Cost Concept

1. For firms that manufacture their own goods for sale. The Production Account is provided to calculate the cost of production.

2. There are two types of costs in production, ie:

  1. Fixed Cost
  2. Cost Changed

Production cost = Fixed cost + Cost changed

Fixed Cost

  1. Fixed costs are costs that are unchanged even though the amount of production increases or decreases.
  2. Examples of fixed costs are rent, insurance on plant and machinery, land tax, depreciation of fixed assets, manager’s salaries, and factory supervisors.
  3. The following graph shows the fixed cost over the long term.

  1. In the long run, fixed costs may increase as production continues to grow. For example, the factory supervisor’s salaries may increase as more factory supervisors are hired to supervise the increasing number of factory workers due to the increase in production.
  2. The following graph shows the fixed cost over the long term.
For production activities in the range of 0 to 2,000 units, the fixed cost is RM2,000. For production quantities from 2,000 units to 4,000 units, fixed costs increase to RM3,000 and further increase to RM4,000 if the production quantity exceeds 4,000 units.

Cost Changed

1. Cost changed is the cost that changes when the number of production changes. Cost changed increases when production amount increases and decreases when the production amount decreases.

2. Examples of cost changed are the cost of raw materials, labor costs, and other expenses that change just about the change in production.

3. The cost changed can be illustrated through the following graph:

  1. In the production of goods, the cost involved can also be divided into three components, namely:
    • Material cost
    • Labor cost
    • Overhead cos