Production Cost

AAA

DEFINITION of 'Production Cost'

A cost incurred by a business when manufacturing a good or producing a service. Production costs combine raw material and labor. To figure out the cost of production per unit, the cost of production is divided by the number of units produced. A company that knows how much it will cost to produce an item, or produce a service, will have a clearer picture of how to better price the item or service and what will be the total cost to the company.

INVESTOPEDIA EXPLAINS 'Production Cost'

Businesses that know their production costs know the total expense to the production line, or how much the entire process will cost to produce the item. If costs are too high, these can be decreased or possibly eliminated. Production costs can be used to compare the expenses of different activities within the company. In production, there are direct costs and indirect costs. For example, direct costs for manufacturing an automobile are materials such as the plastic, metal or labor incurred to produce such an item. Indirect costs include overhead such as rent, salaries or utility expense.

RELATED TERMS
  1. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  2. Marginal Cost Of Production

    The change in total cost that comes from making or producing ...
  3. Production Efficiency

    1. An economic level at which the economy can no longer produce ...
  4. Unit Cost

    The cost incurred by a company to produce, store and sell one ...
  5. Diseconomies Of Scale

    An economic concept referring to a situation in which economies ...
  6. Operating Cost

    Expenses associated with administering a business on a day to ...
RELATED FAQS
  1. How did mass production affect the price of consumer goods?

    Before the advent of mass production, goods were usually manufactured on a made-to-order basis. Once mass production was ... Read Full Answer >>
  2. What are foundry companies in the electronics sector?

    Foundry companies produce semiconductor chips for third-party manufacturers. Microchip companies utilize foundry services ... Read Full Answer >>
  3. Do production costs include all fixed and variable costs?

    In economics, production costs involve a number of costs that include both fixed and variable costs. Fixed costs are costs ... Read Full Answer >>
  4. Is a good's production cost related to its value?

    According to certain economic theories, a good's production cost is very closely related to its value. The production cost ... Read Full Answer >>
  5. To what extent does government regulation impact the electronics sector?

    Many electronics sector companies are tightly regulated. Environmental and product quality regulations are common around ... Read Full Answer >>
  6. Do production costs include the marginal cost of production?

    Production costs include all costs association with production. The marginal cost of production is the cost of producing ... Read Full Answer >>
  7. What's the difference between the production cost and the manufacturing cost?

    Production costs include any expenses associated with business activity for an organization. Manufacturing costs only include ... Read Full Answer >>
  8. Are all fixed costs considered sunk costs?

    In accounting, finance and economics, all sunk costs are fixed costs. However, not all fixed costs are considered to be sunk. ... Read Full Answer >>
  9. How can marginal utility explain the 'diamond/water paradox'?

    One of the most disconcerting problems to Adam Smith, the father of modern economics, was that he could not resolve the issue ... Read Full Answer >>
  10. How can particular scarcities benefit specific stocks?

    In general, a scarce resource is one for which supply does not meet demand. This causes the price of the resource to increase ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  2. Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  3. Investing Basics

    Economic Indicators That Do-It-Yourself Investors Should Know

    Understanding these investing tools will put the market in your hands.
  4. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Markets

    Company Clone Cost Reveals True Value

    Find out how calculating a reproduction cost for a company can beat out the dividend discount model.
  6. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  7. Economics

    What is Deadweight Loss?

    Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  8. Economics

    The Big Chill: What’s Wrong With The U.S. Consumer

    Based on the most recent April data, investors may, once again, be disappointed when the second-quarter gross domestic product (GDP) report comes in.
  9. Economics

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.
  10. Economics

    Explaining Tier 1 Capital

    Tier 1 capital refers to the core capital a bank must maintain in relation to its assets.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center