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Raw materials -opportunity costs

If a firm utilizes raw materials that experience price fluctuations (e.g. silver for Georg Jensen), it is the rebuy-price, at the time of the decision that should be integrated into the cost calculations. A possible profit or loss based on the difference between the original cost price and the cost price at the time the decision is made should be defined as a speculative profit or loss.

Under specific circumstances, the firm can build up raw materials as a "last production." In these situations, it is possible to do a cost estimate. This estimate should use the price the raw materials could be sold for, which is often well below the cost price. A fence manufacturer having bought wood cut to a specific length, could represent a hypothetical example. These pieces of wood could only be resold at a substantial price reduction. Other examples include: companies ceasing production of a certain item, or who are going bankrupt, etc.

Hourly wages -blue collar

Blue-collar workers, or employees with an hourly wage, have traditionally been people that could be hired and laid off on a short notice. In the traditional industrial perception these people have a relatively limited knowledge and represent low training costs.

The reality in the industrial world is though quite different. The following circumstances are some of those which affect this scenario:

o There are very few jobs that do not have a required training-period, with attached training costs.

o For many jobs, the training of new employees constitutes a significant investment, which increases the repercussions of time horizon layoff decisions.

o Most hourly paid employees have a mandatory giving notice period, varying from days to weeks.

o Many hourly paid employees have competencies which are expensive for companies to replace. These competencies are often even more crucial for the firm than those possessed by white collar workers.

o Most of the job functions can be carried out in a more or less correct manner, with more or less confidence, and with a variable quality of production as a result. Therefore, employees should be ranked so that the ones most valuable to the firm are the first to be employed and so on. In this way, the wage costs per unit produced will increase with the size of production as a direct consequence of employees having different qualifications.

Production costs, direct

Direct production costs vary with production size. Regarding the production of beer, the following examples have relevance:

o Production unit element level (brew, bottle, label, top)

o Series element level (packing, internal transportation)

o Product element level (daily cleaning, power)

o Product line element level (systematic maintenance, product control)

Normally, a product or service unit would be estimated including the direct costs concerning all these element levels. This procedure is due to the decision-making situation connected with production, which also involves decision-making focusing on selling goods, and in this case, all production costs should be included. Read more about this topic in the chapter about calculations, where fixed and variable costs are addressed.

Production costs, indirect

A number of indirect costs are also involved in the produced unit, and can neither logically or unambiguously be attributed to the production - but nonetheless they can be unavoidably connected to production. These costs often include service functions related directly to the production activity, such as:

o Raw materials (control, management, waste, etc.)

o Employees (cleaning, training, illnesses, cafeterias, etc.)

o Production lines (maintenance, repairs, updates)

o Communication

Especially the principles of Activity Based Costing (ABC), examined in the calculations chapter, methodologically treat these areas and their relation to handling of costs.

 
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