PRODUCTION AND COST

PRODUCTION The creation of any good or service for the purpose of selling to buyers. It covers the creation of outputs by business firms by government agencies, and by nonprofit institutions like schools and hospitals.

THE CONCEPT OF PRODUCTION

EXAMPLES OF PRODUCTION ACTIVITIES:

The farmer producing vegetables The psychiatrist producing specialized service The songwriter producing a new song The Department of Public Highways producing roads A mother producing meals for her children Suzuki Corp. producing motorcycles

PRODUCTION in general is any activity that creates value.

TRANSFORMING INPUTS INTO OUTPUTS

Production is an activity where inputs are transformed into outputs.

It
a.

requires:
Assembling the necessary inputs Transforming the inputs through a recipe and technological process into outputs of goods and services.

b.

VARIOUS INPUTS IN PRODUCTION

Capital including raw material ingredients, supplies, tools, machinery, equipment, and physical facilities. Labor which combines and process the various materials. Land where the space allotted for processing is located. Entrepreneurial or managerial talent which performs functions like supervision, planning, control, coordination and leadership.

CATEGORIES OF PRODUCTION ACTIVITIES

1. Unique product production

 

 

This type of production activity has its output made-toorder products and services. Each product is more or less distinct like the satellite disc, the space station, the tailor-made dress, the services of a public relations firm or a movie. High demand on skill and craftsmanship typify this type of production. Low volume of production is not uncommon but high volume can be achieved by increasing the size of the workforce. Production activity starts when an order comes in.

CATEGORIES OF PRODUCTION ACTIVITIES

2. Rigid Mass Production



This production activity involves the manufacture of uniform products in large quantity using a well-defined, proven, and usually inflexible technology. The tools, materials, and parts used are standardized, which make movements and outcomes highly economical. Standardization makes the tools (as well as materials and parts) interchangeable which minimizes disruptions in processing. This makes possible mass production in short periods of time.

CATEGORIES OF PRODUCTION ACTIVITIES

3. Flexible Mass Production



This type of production activity, processing is done in two stages.

First stage - involves mass production of standardized components Second stage the components are assembled into final products that appear different from one another.

In the manufacture of refrigerators for example, a company produces standardized parts and assembles them into different sizes and models that will suit different consumer requirements. Flexible mass production clearly has the cost efficiency advantage in addition to its ability to cater to consumer needs.

CATEGORIES OF PRODUCTION ACTIVITIES

4. Process or Flow Production

Its

feature is a continuous flow of output Integrated technology is employed to move a continuous flow of raw material inputs through the system. This production activity is highly automated and mechanized, resulting to high production efficiency when operated at capacity or near capacity 24 hours a day and 7 days a week. The lower the unit costs, the more facilities are used.

PRODUCTIONS FUNCTIONS
Out put of a production process will depend on the quality and quantity of inputs used. y Various combinations of inputs will result to different quantities and qualities of output.
y

PRODUCTION FUNCTION


Example


To produce 100 cavans of palay,



   

The use of a certain farming technology on a given hectare of land with certain characteristics, The use of certain quantity and quality of seeds A given number of bags of fertilizer The use of specified tools and machinery, and the application of a certain amount of labor will all be a part of the requirements.

PRODUCTION FUNCTION
The

relationship between the amount of inputs required and the amount of output that can be obtained.

PRODUCTIONS FUNCTIONS

A schedule (a table or mathematical equation) showing the maximum amount of outputs that can be produced from any specified set of inputs given the existing technology. A catalog of output possibilities.

ANALYSIS OF THE PRODUCTION PROCESS

The classes of inputs Fixed input is one whose quantity cannot be readily changed when market conditions indicate that a change in output is desirable Example: Fixed inputs are buildings, major pieces of machinery and management personnel

Cannot be readily increased or decreased.

ANALYSIS OF THE PRODUCTION PROCESS

The classes of inputs

Variable

input is one whose quantity can be readily changed when a change in output is desired. Example:
Direct

labor, raw materials and supplies.

ANALYSIS OF THE PRODUCTION PROCESS

The time frame references

Short-run refers to that time frame in which the input of one or more productive agents is fixed. Any time period not long enough to allow the full effects of some changes to have operated. Change can be done through changes in variable inputs.

ANALYSIS OF THE PRODUCTION PROCESS

The time frame references Long run is that period of time in which all inputs are variable. This is because when fixed inputs need adjustment, it can be done when given sufficient time.

PRODUCTION WITH ONE VARIABLE INPUT

y

The number of inputs in any production process varies from 1 100. Assume that there is only one variable input which can be combined in different proportions with fixed inputs to produce various quantities of output.

TOTAL, AVERAGE AND MARGINAL PRODUCTS

Total Output

Refers to the total amount of output produced in physical units such as bags of fertilizers, bottles of vinegar or pairs of shoes.

PRODUCTION WITH ONE VARIABLE

Average product refers to the total output divided by the quantity of the variable inputs under consideration. Marginal product is the additional out put attributed to the increase in the quantity of the variable inputs under consideration.

TOTAL, AVERAGE, AND MARGINAL PRODUCT OF A SOAP MANUFACTURER

No. of Workers 1 2 3 4 5 6 7 8 9 10 Total Output per day 50 bars 100 150 200 275 350 475 525 500 480 Average Product 50 bars 50 50 50 55 58.33 67.85 65.63 55.55 48 Marginal Product 50 bars 50 50 50 75 75 125 50 -25 -20

LAW OF DIMINISHING RETURNS

Assuming that the amount of the other inputs required in the production process are kept constant, as more of the same input is employed in the production of a particular good, the corresponding increase in total output tends to become smaller and smaller.

COSTS OF PRODUCTION

Short-run costs
Total cost refers to the sum of all the expenditures in producing goods and services. It may be used for national accounts as well as that of the level of the firm.

Short-run costs

COSTS OF PRODUCTION

Fixed cost is that portion of the total cost which remains unchanged even if the level of output changes. (e.g. RENT) Variable cost is that part of total cost that do not vary with the amount of output produced. (e.g. Wages and raw materials)

COSTS OF PRODUCTION OF A CHOCOLATE MANUFACTURER Average Bars of Total Cost Total Fixed Total
Chocolate 200 300 400 500 600 700 800 900 1000 1200 (FC+VC) 1050 1200 1450 1650 2250 2750 3250 3700 4500 5250 Cost (FC) 500 500 500 500 500 500 500 500 500 500 Variable Cost (VC) 550 700 950 1150 1750 2250 2750 3200 4000 4750 Cost 5.25 4 3.625 3.30 3.75 3.93 4.06 4.11 4.5 4.375

AVERAGE, AVERAGE VARIABLE COST AND AVERAGE COST

Quantity Produced (QP) Average Cost AFC+AVC Total Fixed Cost (TFC) Average Fixed Cost (AFC) TFC/QP P 10 5 3.33 2.5 2 1.66 1.43 1.25 1.11 1 Total Variable Cost (TVC) 1500 2000 2500 3000 3500 4000 5000 6000 7000 9000 Average Variable Cost (AVC) TVC/QP P 15 10 8.33 7.5 7 6.66 7.14 7.5 7.77 9

100 bars 200 300 400 500 600 700 800 900 1000

P 25 15 11.66 10 9 8.33 8.57 8.75 8.88 10

P 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000