Production Costs

Production costs are the costs of making factor input into higher value outputs of goods and services. The costs of manufacturing products include costs of raw materials, labour costs, depreciation of plant and equipment, rent, lighting, and heating of factory buildings.

It is important to say that factor inputs can be combined in a variety of ways to produce the same amount of output. One method which is technically the most efficient is the one which uses only small amounts of labour, while another method may employ large quantities of labour and only a little capital. In physical terms, the method which is technically the most efficient is the one that uses the fewest inputs. Economists, however, are more interested in the cost aspect of the input-output relationship, specifically the least costly way of producing a given output.

To achieve the highest efficiency, that is, the optimal relationship between factor inputs and outputs of goods and services, the economist analyzes the relationship between the cost of factor inputs and the cost of output in a firm. In order to determine the cost of producing a particular output it is necessary to know not only the required quantities of various inputs but also their prices. The factor prices a firm must pay in order to buy units of these factors will depend upon the interaction (взаимодействие) of the forces of demand and supply in factor markets.

Depreciation of Assets

In accounting, the process of allocating in a systematic and rational manner the cost of certain items of the assets (these are mainly capital assets) over the period of its useful life is known as depreciation. There are three main types of depreciation causing the decrease in value of an asset: 1) physical depreciation, 2) moral depreciation, 3) deterioration (порча, повреждение, износ).

In the process of production the capital assets gradually wear out, thus after a definite period of time they have to be replaced. This is known as their physical depreciation.

However, capital assets are also subject to moral depreciation, that is after serving for some period of time, they may become obsolete (устаревший) before they are physically worn out and have to be replaced by more up-to-date means of production. Such obsolescence (изношенность) of the assets is caused by technological changes and by the introduction of new and better machinery and methods of production. Obsolescence can also be caused by the commodity produced by the asset, for example, if it goes out of fashion. In the latter case, the degree of obsolescence will depend on the specific nature of the asset. Sometimes assets can be easily adapted to alternative uses while others may have only one application.

Deterioration means a change in value of an asset because of the effects of nature, for example, for machinery this might be rust (ржавчина), for buildings it is connected with decadence (ухудшение), for farm lands it is caused by erosion.

In accounting, it is important to know depreciation of the capital assets as it increases the company's expenses, so two main methods are used by accountants in calculating periodic depreciation. The most widely used is the straight-line method (метод равномерного исчисления износа), in which the rate of depreciation is constant for the entire working life of the capital assets. According to the second method known as accelerated depreciation method (ускоренный метод исчисления износа), the depreciation rate in the first years of asset use is greater than in the later years.