Mastering Production Factors, Efficiency, and Business Cost Calculation
Production Functions and Value Creation
The core Functional Departments of Production (FUNC.DEP.PROD) include:
- Provision (Sourcing)
- Manufacture
- Storage
- Quality Control
Understanding Value Added
Value Added (VALOR AÑADIDO) is the sum of additional value applied to raw materials, which individually have a lower value, resulting in a combined final product of higher worth.
Factors of Production and Technology
Factors of Production (FACT.PROD) are the physical, human, and organizational resources which, when combined, produce a specific good or service. These factors are:
- Natural Resources: Raw materials that form the product.
- Labor: The effort or time workers devote to producing a good or service.
- Capital: The set of goods needed for investment and production.
Technology and Production Methods
Technology refers to how you combine the factors of production to obtain a product.
Technological Change (CAMBIO TECNOLÓGICO) occurs every time there is a change in the way these resources are combined.
Measuring Production Performance and Efficiency
Productivity of a Production Process
The Performance (or Productivity) of a Production Process is the relationship between the amount and quantity of inputs used and the production obtained.
Productivity of Production Factors
The Productivity of Production Factors (PROD. FACT. PROD) measures the performance of production factors in relation to the output obtained. It is the production obtained for each unit of production factor used:
- Labor Productivity (PROD. TRAB): Amount produced per worker or per hour worked.
- Capital Productivity (PROD. CAPIT): Quantity produced per unit of productive capital or machine.
- Total Factor Productivity (PROD. TOT): The relationship between the economic value of production (amount produced multiplied by the sale price) and the total cost of the factors used.
Returns to Scale
Returns to Scale (or Scale Economies) describe how output changes when all inputs are increased proportionally:
- Decreasing Returns to Scale: If the increase in production is less than the increased use of the productive factors.
- Constant Returns to Scale: If the increased production is in the same proportion as the increased use of inputs.
- Increasing Returns to Scale: If output increases more than proportionally to the increase in inputs.
Efficiency and Company Cost Structures
Technical and Economic Efficiency
A production process uses more technically efficient techniques than another if, to get the same amount of product, it uses less of at least one production factor and not more of any other.
Within technically efficient technologies available, the company selects the economically more efficient one, which involves achieving the lowest cost.
Company Costs (COSTES COMPANY)
Costs are categorized based on their relationship to production volume:
- Fixed Costs (C. FIXED): Those independent of production; they do not change if the quantity produced changes.
- Variable Costs (C. VARIA): Those costs that vary with the level of production, such as the costs of factors that change with production (e.g., raw materials, labor, or energy consumption).
- Total Costs (C. TOTALES): The sum of fixed and variable costs.
- Marginal Cost (C. MARG): The increase in total cost resulting from increasing production by one unit.
Direct and Indirect Costs
Costs can also be classified by their traceability to the product:
- Direct Costs (C. DIRECTOS): Those directly associated with production and that can be assigned specifically to each product.
- Indirect Costs (C. INDIRECTOS): Those that affect the production process in general or are common to a number of different products, and therefore cannot be assigned directly to a specific product cost calculation.
Cost Calculation Techniques
Two primary systems are used for calculating product costs:
System Full Costing (SIST. FULL-COSTING)
Assumes that the cost of production of a product is the sum of direct costs plus the proportionate share of fixed or indirect costs attributable to the product.
System Direct Costing (SIST. DIRECT-COSTING)
Assumes that the cost of production is the sum of direct costs and variable costs, meaning only costs that can be assigned to a product without using an allocation criterion.