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Production, costs, and pricing
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Everything about Production Costs And Pricing totally explainedIn microeconomics, production is the act of making things, in particular the act of making products that will be traded or sold commercially. Production decisions concentrate on what goods to produce, how to produce them, the costs of producing them, and optimizing the mix of resource inputs used in their production. This production information can then be combined with market information (like demand and marginal revenue) to determine the quantity of products to produce and the optimum 'pricing'(Imaga, 1994: 384).
(In macroeconomics, production is measured by gross domestic product and other measures of national income and output.)
Aspects of production and pricing theory
Production systems
Mass Production
Characteristics
Equipment is expensive and used for a solitary purpose.
A very small variety of goods are produced.
Goods are transported from one fixed work station to another.
Advantages
Greater specialisation.
Optimum utilisation of workers and machinery.
Low production costs per unit.
Low stock-piling costs.
Restricted handling of materials.
Production control is simplified.
High sales earning profit.
Division of labour.
Equipment standardized.
Products uniform.
Disadvantages
Expensive capital for equipments/machineries.
Jobbing
Characteristics
General, all-purpose machinery.
Products are generally capital goods.
One task must be completed before the next may commence.
Customers give specifications.
Production processes are seldom repeated.
Workers must be highly skilled.
Control of production is simple.
Batch production
Characteristics
Falls between mass production and jobbing.
One batch of products must be completed before work on the next one may begin.
Customers give their specifications.
Similar products produced on a batch basis, in large quantities.
Advantages
Greater flexibility in terms of quantity produced, factory layout and manufacturing process.
Can adjust to changes in demand.
Less time wasted during machinery-breakdowns.
Less expensive machinery.
Disadvantages
Products take longer to produce.
Larger quantities of semi-finished goods must be kept, hence increasing stockpiling costs.
Cost per unit is generally higher.
Careful planning needed to use this method effectively
Factory layout
Advantages of a proper factory layout
For workers
Less exertion
Less handling
Happier and more productive in pleasant working conditions
Fewer accidents
For Company
Less working capital required
Less money invested in stock
Increase in factory safety
Easier production control
Lower labour, maintenance and transport costs
High production yield
Fewer labourer; fewer salaries and wages to pay
Requirements of a good factory layout
Practical and economical
Complies with government safety regulations
Adaptable
Promote workers' health
Maximum space (vertical and horizontal) utilised
A logical, consecutive process
Materials have to travel the shortest possible distance.
Factory plant and machinery
Types of machinery
Standard machines are built on a broad scale and are easier to maintain. They are used for batch production and jobbing.
Specialised machines are built to specific requirements and are difficult to resell. They are used for mass production.
Factors to consider when purchasing machinery
Lifespan
Training that workers might require
Availability of replacements
Effect on factory layout
Cost of purchase and maintenance
Resale value
Utilisation period per day
Whether or not it can be utilised economically
Rate of production
Accuracy
Availability of parts
Rate of Lun
Maintenance
Remedial maintenance -- complete overhaul when machinery breaks down
Preventative maintenance -- minor or major repair to prevent breakdown
Conditional maintenance -- inspection of condition
Product specification and methods of production
Product specification refers to anything which describes how a product will be manufactured.
Product planning and control
Advantages of efficient planning
For the supplier of raw materials
Assured of a continued relationship with the factory
Assured of regular orders from the factory
For the dealer
Regular supply at a reasonable price
Assured against having to search for suppliers all the time
Usually assured of a certain quality, quantity and timeous and correct delivery
Costs reduced
For the worker
Job satisfaction is promoted.
Healthy and safe working environment
May result in improved wages or salaries
Knowledge of what is expected
For the consumer
Regular supply at right place and time
Lower prices due to reduced production costs
Quality control
This is a system for determining at which points in the production process deviations and deficiencies emerge.
How to go about setting quality control
Workers and inspectors must be made well aware of the prerequisite standards, and tolerances must be set.
A suitable number of inspection points must be decided upon.
Reliable testing and inspecting measures must be used.
A suitable number of inspections per inspection point must be decided upon.
Advantages of quality control
Dealers and customers are assured of the quality of the goods that they're purchasing.
It can serve as a reliable basis for wage incentive schemes.
Workers are encourage to continue to produce goods of a certain standard.
Production costs can be lowered.
It can lead to improved product design and quality.
Work study (time and motion only)
Work study is a scientific measure of working methods, with the aim of finding more effective methods, machinery and materials, standardising them and determining a standard time for every method.
Method study analyses all working methods and the organisation of machinery with a mind to finding more effective production methods.
Work measurement is an evaluation of exactly how long it takes suitably skilled workers, labouring at maximum tempo (without adversely affecting health) with standard and according to stipulated requirements, to complete a given task.
Safety measures
Hygiene requirements for workers
Firewalls dividing rooms and other parts of the factory
General safety and security
Environmental conservation
Flammable materials stored underground
Availability of fire-fighting equipment
Two exits in every room
Fire escapes
Structural safety of walls, floors and roofs
Protection against machinery
Production costs
Functions of a cost accountant
Consulting with the chief accountant to come to a decision on the spending of fixed and working capital so as to obtain an optimum return
Investigating deviations from set standards and making corrective recommendations
Compiling a comparison between the different production methods and presenting it to management
Bookkeeping for all manufacturing expenditure and costs
Analysing cost components
Calculating cost price so that a selling price may be set
Why cost is important to the consumer
The consumer has limited means or buying power.
The consumer will benefit from a lower selling price.
The consumer will benefit, too, in a market where supply and demand forces prices down.
Competitive prices of substitute goods also benefit consumers.
Why cost is important to the manufacturer
Provides management with information for decision-making
Helps to determine the break-even point
Determines the cost of raw materials, labour and other manufacturing costs for each component and completed product
Makes easier the adjustment of the selling price for the purposes of competition
Allows management to analyse unit production costs
Determines safety margins in production
Cost components
- Direct raw material costs -- costs of raw materials used to make a specific product.
- Direct labor costs -- costs of labor used to make a specific product.
- Overheads -- costs that can't be charged directly to a specific product.
- Fixed overheads -- stable costs that occur regardless of whether or not goods are being produced (for example rent of factory). These are allocated according to the number of machine hours.
- Variable overheads -- changeable overhead costs that vary according to the number of goods produced (for example water and lights). These are allocated according to the number of labor hours.
- Indirect raw material costs -- costs of raw materials whose role in the manufacturing of a product can't be easily determined (for example glue).
- Indirect labor costs -- costs of labour that can't be charged to a particular product (for example the floor sweeper in a factory).
Primary production costs = direct labour + direct raw materials
Overhead expenses = fixed overheads + variable overheads
Total production costs = primary production costs + overhead expensesFurther Information
Get more info on 'Production Costs And Pricing'.
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