The Nature of Resource Cost Structure - Coursework Example

Resource Cost Structure Name Date Course Introduction Production is an important function in economics. The process of production involves converting factors of production into outputs. The outs are valuable to the organizations. An organization has to incur costs during the process of converting the factors of production into outputs. A firm can incur different types of costs and they influence the production process of the company (Shafiee, Finkelstein & Chukova, 2011). Some of the costs may be fixed while others are not fixed. As a result of the cost, an organization may end up making profits or losses. It is important to note that the higher the production costs, the lower the profitability of a business. Any profit making organization has to ensure that the costs are low. A non profit making organization may not be able to sponsor its activities incase of high costs. The paper discusses the cost structures and their practical significance. Discussion Fixed costs are some of the important costs that an organization has to incur. The fixed costs involve the amount of money that an organization has to spend to produce something that is not related to the amount of the product. The fixed costs in most cases are usually referred to as sunk or overhead costs. The capital of the company is one of the aspects of the fixed costs of an organization. This is considering that every organization must have a capital. The fixed costs may also be explained as the amount of money that an organization has to spend before producing anything (Shu, Li & Zhong, 2012). This means that the costs is constant and the organization must incur the fixed cost as long at is in operation. The fixed costs are also incurred by an organization regardless of whether it is making profits or not. The fixed cost may also involve the infrastructure that an organization has to put in place when established the business. The fixed costs may therefore require maintenance from time to time. The fixed costs are relevant to an organization as it determines the input that an organization has to put in place in order to run its operations. Depending on the size of the firm, the fixed costs may be high or low. It is also important to note that part of the fixed cists may be recovered by a firm incase it decided to close down it. The fixed costs are therefore important to an organization as an organization cannot operate without the fixed costs. The variable costs also form part of important costs in the cost structure of a firm. The variable costs are the cost that changes with respect to the quantity produced. The variable costs increases when the production is high and it reduces when the production is low. The variable costs mainly involve the non capital factors of production. The non capital factors of production include labour, materials and energy. The labour, or amount of materials used for the production process usually change from time to time depending on the amount that needs to be produced. The variable costs are dependant on the supply and demand. The variable costs within a firm may increase when the demand for its products are high (Yamamoto, 2011). This is because the organization will be forced to produce more in order to meet the demands of the customers in the market. On the other hand, it is also important to note that the variable costs may also impact negatively on the profitability of an organization. The higher the variable costs the lower the profitability of an organization. However, it is important to note that some forms of variable costs may also be considered fixed costs as they do not change. This may involve some form of labour in the organization that is constant and does not change regardless of the production. The variable costs are relevant to an organization in terms of establishing the amount that needs to be produced. A firm should monitor the variable costs in order to respond appropriately to the supply and demand. The total cost is an important type of cost that determines the amount that an organization has spent. The total cost is the sum of the variable and the fixed costs. The total cost can be represented using the abbreviations TC= FC+VC. When calculating the total cost, the variable cost is usually the total of all the variable costs whole the fixed cost is the sum total of all the fixed costs in an organization. The variable costs play an essential role in determining the total amount that a firm has spent while carrying out it operations. The fixed total cost can be used for the purposes of determining the profitability of a firm (Haugen, et al, 2012). This can be obtained through subtracting the total costs from the total income. A firm incurs profit when the total income is more than the total cost. However it incurs losses when the total cost is more than the income. High levels of accuracy should be maintained when calculating the total costs. This is because any errors may provide misleading information regarding the financial position of the organization. An organization should also ensure that it has put in place adequate measures to control the total cost in order to avoid losses. Most of the organizations are usually interested in the total costs as it determines the amount profits that it had made. On the other hand, it is important to note that the total costs are also influential in a firm in terms of determining the measures that needs to be put in place in order to reduce the total costs. The average cost is also one of the costs that a firm must determine. The average cost is defined at the total coat divided by the quantity. The average cost can be represented as; AC= TC/Q where AC is the average cots, TC is the total cost and Q is the quantity. The average cost plays an essential role determining the ration of the total cost and the quantity within an organization. The marginal cost is considered as the most important cost for an organization. The marginal cost is the cost of producing one more unit. In economics, the marginal cost is considered as the cost of producing the last item. The marginal cost is also considered as the change in the total cost for the change in quantity. The marginal cost can be represented as MC= (Delta TC)/ (Delta Q). The calculation of the marginal cost involves some mathematical equations and formula. This requires a lot expertise and accuracy when dealing with the data. On the other hand, it is also important to note that the marginal cost is relevant to the organization in terms of enabling the organization to understand the cost that is incurred when producing a certain product. This information is useful in enabling the organization to put in place measures that reduces wastages when it comes to the production process. The marginal costs are also useful to the organization in terms of determining the efficiency in terms of costs that is involved during the production of different units. The understanding of costs is important to an organization in terms of ensuring that the budget that is prepared reflects the different costs. A proper understanding of the different cost enables the management to make informed decisions with regards to the cost the amount that it has to spend on the organization (Della Lucia, 2013). It is also important to note that the organizational planning depends on the costs that it has to incur during the process. An effective plan can only be made when the organization is aware of the amount that it will spend. On the other hand, it is also important to note that the organization can only achieve its goals and objectives once it is aware of the different costs that it will incur. The amount to be produced by the company is also dependant on the understanding of different costs. The understanding of the marginal cost as well as the variable cost is important to an organization in determining its capacity and capabilities to produce. On the other hand, it is also important to note that the concepts of economics play an essential role in determining the production at the company. The profit and loss analysis of an organization is also dependant on the costs that it incurs during its operations. This is an indication that the information can be used for the purposes of ensuring that the organization is able to avoid losses. The profit making organization requires the cost information in order to determine its profitability. Conclusion In conclusion, it is evident that the cost structure contains different types of costs. Each type of cost is relevant to the organization in various ways. The variable cost mainly involves the cost that changes from time to time depending on the levels of production in the organization. It is also evident that the fixed costs are constant and it has to be incurred by an organization as long as it is operational. An organization has to incur fixed costs whether it carries out production or not. The total cost is the sum of the fixed costs and the variable costs and an organization has to understand its total cost. It is evident that the marginal cost is important to an organization in terms of creating an understanding of the amount incurred when producing the last item. It is also evident that an organization needs to know the average costs. The understanding of different cost enables an organization to make appropriate decisions regarding its expenses. References Della Lucia, M. (2013). Economic performance measurement systems for event planning and investment decision making. Tourism Management, 34, 91-100. Haugen, K. K., Lanquepin-Chesnais, G., & Olstad, A. (2012). A fast Lagrangian heuristic for large-scale Capacitated Lot-size Problems with restricted cost structures. Kybernetika, (2), 329-345. Horngren, C. T. (2012). Cost Accounting: A Managerial Emphasis, 13/e. Pearson Education India. Shafiee, M., Finkelstein, M., & Chukova, S. (2011). On optimal upgrade level for used products under given cost structures. Reliability Engineering & System Safety, 96(2), 286-291. Shu, J., Li, Z., & Zhong, W. (2012). A production–transportation problem with piecewise linear cost structures. IMA Journal of Management Mathematics, 23(1), 67-79. Yamamoto, M. (2011). On the cost structures of the end-of-life product logistics. Journal of International Logistics and Trade, 9(2), 57-76. Read More