ROLE OF REVENUE AND COST IN PRODUCTION

Revenue :The money that comes into the firm from the sale of their goods . Marginal Revenue : additional revenue the firm receives from the sale of each unit. Profit = Total Revenue (TR) - Total Costs (TC)

Cost: the expense that must be incurred in order to produce goods for sale . TYPES OF COSTS:: Fixed cost Variable cost Marginal cost Opportunity cost Inventory cost Carrying cost

Fixed cost: Fixed costs are those costs, which do not vary with the changes in the output of a product. Variable cost: Variable costs are those costs that vary with the level of output. They include payment for raw materials, charges for fuel and electricity, payment of wages and salaries of temporary staff, and payment of sales commission. Marginal cost: additional cost associated with one additional unit of output

Opportunity cost: It is the cost related to the nextbest choice available to someone who has picked between several mutually exclusive choices Inventory ordering cost : cost incurred to procure the materials. Inventory Carrying cost : includes insurance cost , property taxes storage costs cost of obsolescence and deterioration , and the opportunity costs of invested funds.

Types of production costs

Total cost Total fixed cost Total variable cost Average fixed cost Average variable cost Average total cost Marginal cost

Cost function

The cost function is a function of input prices and output quantity. Its value is the cost of making that output given those input prices.

Determinants of cost function

Size of plant Output level Prices of input State of technology Managerial and administrative efficiency

BREAK EVEN ANALYSIS

Break-even analysis is a technique widely used by production management and management accountants. It is based on categorizing production costs between those which are variable costs and fixed costs. Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss

Break even point

It is the level of sales at which profit is zero. According to this definition, at break even point sales are equal to fixed cost plus variable cost. Profit = (Sales Variable expenses) Fixed expenses

Advantages and Disadvantages of Break-even Analysis

Break-even is an excellent method of analysing a business. Its advantages are: It is cheap to carry out and it can show the profits/losses at varying levels of output. It provides a simple picture of a business - a new business will often have to present a break-even analysis to its bank in order to get a loan.

A break-even analysis can have some disadvantages: It assumes that everything produced is sold whereas it is often the case that not all output will be sold. It assumes that all of the output is sold at the same price - often a business will have to lower its price in order to increase its sales.

ABC ANALYSIS

ABC analysis is a business term used to define an inventory categorization technique often used in materials management. It is also known as Selective Inventory Control or Pareto analysis It provides a mechanism for identifying items that will have a significant impact on overall inventory cost

"A class" inventory will typically contain items that account for 80% of total value, or 20% of total items. "B class" inventory will have around 15% of total value, or 30% of total items. "C class" inventory will account for the remaining 5%, or 50% of total items..

Economic Order Quantity

It is the level of inventory that minimizes the total inventory holding costs and ordering costs.

Profit Maximization : If the cost of producing one more unit output is smaller than the amount you can sell that unit for, youll make more profit by producing that unit

Conclusion