Business
Cost Function
A cost function is a mathematical formula that represents the relationship between the cost of production and the level of output. It helps businesses analyze and optimize their production processes by identifying the costs associated with producing goods or services. By understanding the cost function, businesses can make informed decisions about pricing, production levels, and resource allocation.
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4 Key excerpts on "Cost Function"
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
The total cost in the production programme increases either due to increase in output or due to rise in prices (some or all) of inputs. If the firm employs the inputs that can be substituted, then the firm prefers to substitute cheaper input for dearer input and hence, the total cost will be less than the case, if it could not substitute between inputs. For example, if labour costs account for nearly 65 per cent of total costs in a processing firm, and there is the potential for labour costs to double, this does not mean that, the firm’s costs will rise by 65 per cent, as the firm will substitute machinery for labour This ebook is exclusively for this university only. Cannot be resold/distributed. in the production programme. So, total costs of the firm will decrease. Like total Cost Function, average and marginal Cost Functions are also homogeneous of degree one in input costs. D. Relation between Cost Function and Production Function As studied in the Chapter 2 , production function deals with the relationship output and factors employed in the production programme. Cost Function deals with the functional relationship between cost and output. Since, output is a function of factors employed in the production programme, we can derive the Cost Function from the production function, provided, if we know the prices of the factors employed and quantity of output produced in the production programme. Say, for example, if 10 units of manure and 20 units of fertilizer are employed to produce 100 units of output and if the price of manure is Rs 50 per unit and price of fertilizer is Rs 100 per unit, then the TC of producing 100 units of output is given by (10x50) + (20x100) = Rs. 2500. This cost-output relationship gains importance, when the farmer has to allocate resources and determine net returns from a production programme.
eBook - ePubProduction and Cost Functions
Specification, Measurement and Applications
- Erkin Bairam(Author)
- 2018(Publication Date)
- Taylor & Francis(Publisher)
Consequently, in certain respects, despite its apparently greater complexity compared to the form of expressions based on (1), Cost Functions based on (4) may be a more satisfactory starting point for the analysis of economic behaviour than physical production functions. This is the strategy adopted in illustrating the possibilities for analysis in the concluding section of this chapter. Before any analysis can begin, however, it is necessary to recount, for the benefit of economists unfamiliar with the accounting literature, a controversy concerning the accounting interpretation of expression (4) which was almost contemporaneous with the capital theory debate and in some ways paralleled its concerns. The issue revolved around whether it makes empirical sense to treat all inputs in the same manner in Cost Functions if they are long term ‘assets’ (e.g. the machines used in production which might last for years) or short term assets (e.g. units of an input material consumed in production by using the machine). Ultimately replacing sloppy with precise, statistical reasoning can solve this problem. As will be shown, expression (4) itself, while apparently plausible at first sight is still, as yet, a misleading simplification of an accurate model of reality. III. Production and Cost Functions in Accounting It is in the nature of their work that accountants tend to be concerned with Cost Functions 14 and the measurements with which they are associated rather than physical production functions as such. Nevertheless, given the objective of relating revenues and expenses generated by the firm to its production activities, it would be expected that the accountant would have to implicitly consider the relationship between physical inputs and outputs in production in order to construct performance measures such as accounting earnings (i.e. the ‘profit’ or ‘loss’ disclosed in the income statement of firms)
- Trefor Jones(Author)
- 2004(Publication Date)
- Wiley(Publisher)
INTRODUCTION The objective of this chapter is to explore the nature of costs, their importance in decision making and in gaining a competitive advantage. The main topics covered in the chapter include: g Economic concepts of costs in the short and long run. g Cost concepts used by managers. g Empirical procedures for estimating Cost Functions. g Economies of scale, economies of scope and economies of learning. g Costs and competitive advantage. SHORT-RUN COST CURVES In the short run, economic analysis assumes that one factor of production, usually capital, is ¢xed. The ¢rm (as shown in Figure 7.5) is constrained to choose points on the line KT; this allows both a total product curve to be derived and a total cost curve by calculating the total cost at each production point, using isocost curves for given prices of labour and capital. These relationships are plotted in Figure 8.1. The short-run total cost curve has two elements: g Fixed costs: these are the costs of buying the necessary capital before production can begin. These costs do not vary with output and more generally can include any cost that must be met before production commences. g Variable costs: these vary with output and are incurred in employing labour to work with the capital to produce output. More generally, they include all costs (e.g., raw materials) that vary with output. The sum of total ¢xed costs (TFCs) and total variable costs (TVCs) gives the total costs of the ¢rm. In Figure 8.1(b), total ¢xed costs are shown as a horizontal line, because they do not vary with output, while the total variable cost curve is shown as upward- sloping. Its shape will depend on the relationship between inputs used, costs incurred and output. From the total cost curve, short-run average and marginal costs can be derived.
eBook - PDFLean Manufacturing
Business Bottom-Line Based
- John X. Wang(Author)
- 2010(Publication Date)
- CRC Press(Publisher)
23 2 Put Business Bottom Line First: Transfer Function for Production Cost This chapter enables you to Understand the transfer function of production cost and analyze • how companies produce and offer goods for sales Recognize the difference between short-term and long-term cost func-• tions, marginal Cost Function, and the shapes of various cost curves Analyze your industrial sectors to prevent production failures and • win in the market 2.1 Production Transfer Function Lean manufacturing is the production of goods using less of everything com-pared to mass production: less human effort, less manufacturing space, less investment in tools, and less engineering time to develop a new product. In Lean manufacturing, the production transfer function asserts that the maximum pro-duction of a technologically determined production process is a mathematical function of input factors of production. Considering the set of all technically fea-sible combinations of output and inputs, only the combinations encompassing a maximum output for a specified set of inputs would constitute the production function. Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output, given available technology. It is usually presumed that unique produc-tion functions can be constructed for every production technology. The transfer function for production cost specifies the maximum output that can be produced with a given quantity of inputs for a given state of engi-neering and technical knowledge. The production function relates the pro-duction to the amount of inputs, typically capital and labor. It is important to keep in mind that the production transfer function describes technology, not economic behavior. A company may maximize its profits given its produc-tion transfer function, yet generally take the production function as a given element of that problem.
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