Module 8 Lesson 2 - Inquire & Watch

 

Inquire: Production Costs (Short Run – Fixed and Variable Costs) 

Production Costs

Understanding the cost side of a business is vital to its success. Of primary concern are its production costs. Production costs are the direct and indirect costs a firm incurs when it sells a good or service. The direct costs of manufacturing a car, for example, include parts and labor. The indirect costs include rent, administrative salaries, utility expenses, and other overhead.  The term production costs aren’t used in financial accounting.  (If it did, it would be the sum of Cost of Goods Sold and all the Operating Expenses.)

A business's average cost is equal to the total cost divided by the quantity of output sold.  But will your average cost go down if you make more of something? To answer that question, you need to understand the difference between fixed and variable costs. Fixed costs are expenditures that do not change regardless of the level of production. Variable costs are expenditures that vary based on your level of production. If your fixed costs are high, your average cost per unit will go down significantly if you produce more. 

Big Question

How can one determine how much it costs to produce something?

 

Watch: Average Cost 

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Module 8 Lesson 2 of 4