Cost of Production & Classification of Cost of Production

Cost of Production & Classification of Cost of Production
Cost of Production

The cost of production refers to the total money expenses incurred on the conversion of raw material into the particular quantity of goods during a certain period of time.
Cost of Production & Classification of Cost of Production

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Classification of Cost of Production

Following are the different classification of cost of production.

1. Nominal Cost
2. Real Cost 
3. Economic Costs 
4. Implicit Costs 
5. Explicit Cost

Nominal Cost

Nominal Cost is the money cost of production. It is also called expenses of production. These expenses are important from the producer’s point of view. He must make sure that the price of the product, in the long run, covers these expenses including normal profit, otherwise he cannot afford to carry on the business.

Real Cost

According to Smith’s idea, real costs of production are the problems and pains that are borne by the workers in producing the goods. Marshall includes the ‘cost of waiting’ also in the real cost. In other words, the laborer waits to receive his wage and producer waits to get his profits. Marshall also termed it as ‘Social Cost’.

Economic Cost

Economic costs are the payment received by the owner of the factors of production and which guarantee that they will continue to provide their productive services to the process of production.

Explicit Costs

These are the paid cost. These are the payments which are made by the entrepreneur for purchase services of the factor of production or the raw materials. This cost can be computed.

Implicit Costs

In economics, an implicit cost, also called imputed cost, implied cost, or notional cost, is the opportunity cost that result from using an asset instead of renting, selling, or lending it. The term also applies to forgone income from choosing not to work. A cost borne directly is an explicit cost.