Production: Factors, Costs, and Systems

Production: A Three-Point View

Production can be defined in several ways:

• Economic: The development of products from basic productive resources by companies, to be purchased or consumed by households.
• Technical perspective: A combination of elements, such as labor, raw materials, machinery, energy, and direction, based on monitoring and observation of procedures (technology) to obtain goods or services.
• Utility-function perspective: A process that adds value to things, creating useful goods; in other words, it adds value.

Productive Factors

To produce, a series of elements need to be combined:

• Natural Resources: Raw materials, supplies, and energy.
• Labor: The workforce or the time that workers dedicate to production/service.
• Capital: The set of necessary capital goods for production, such as machinery, production facilities, premises, and buildings.

Technology

Technology is a specific way of combining some or specific production factors to produce goods or services. Each good or service produced has an associated production technology.

Cost

Manufacturing a product involves using productive factors that have quantifiable economic value.

• Fixed Costs: Independent of the level of production; they do not change if the quantity produced changes.
• Variable Costs: Proportionate to the level of production (e.g., materials, labor, energy consumption).
• Total Costs: The sum of fixed and variable costs.
• Direct Costs: Directly related to production and can be assigned specifically to each product.
• Indirect Costs: Affect the production process in general and cannot be directly mapped to a product.

Costing Systems

• Full-System Costing: The production cost of a product is the sum of direct costs and the corresponding proportional part of indirect or fixed costs attributable to the product.
• Direct-Costing System: Differentiates costs based on their proportionality to production: fixed and variable, to facilitate decision-making.

Break-Even Point

The company assesses whether it is more convenient to produce a necessary component as a raw material or buy it from a supplier. The break-even point is the minimum production level at which it becomes cheaper to produce than to purchase.