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Administration

In terms of costs, administrative processes are often very difficult to measure because they, in the short-term, are regarded as fixed costs. At the same time, the scope of the processes and thereby the number of employees often varies, partly with the size of production, but also in relationship to a number of decisions made on the management level.

One may be inclined to concentrate more or less on one process, such as sales, communication, IT and/or quality control. This decision is based on a number of considerations centered around increasing sales or savings.

In order to delineate processes in terms of products, or product lines can be very difficult, and it is most often necessary to estimate a percentage to cover these functions when production costs are to be assessed.

o Sales processes

o Production, production management

o Communication

o Controlling and accounting

o Human resources, training, etc.

In most cases the changes in costs, for these processes, are far slower than the changes in sales and production, and therefore they fluctuate much more slowly than the direct production costs.

If changes in production are short lived (1-6 months) adjustments in the costs for these processes can be very small, which is why they resemble fixed costs.

Depreciation

Depreciation, as related to the costs of a given production quantity, is very difficult to handle. Depreciation can be divided into a number of different components:

o Wear and tear of machinery/tools caused by use that has a direct negative impact on the machine.

This factor applies, for instance, to cars, trucks, tractors, etc. In a situation where other influential factors remain unchanged, it is safe to say that a well used machine is in worse shape than a less used machine.

o Deterioration due to time, caused by the fact a machine getting older, and supposedly not being as technologically, or in other ways as up-to-date, as a new machine.

o Technological deterioration, caused by emerging new technology, better suited for a given job, and as thereby reducing the value of the machinery (IT hardware/software etc.).

Depending on the decision-making occasion, one or more of the above mentioned costs must be considered.

Interest

Interest, in relation to production costs, is to be included to the extent to which the carrying out the production demands capital. If storage or machines could be liquidated, interest would be a part of the costs of carrying out production.

Interest should typically be represented by the most expensive part of the financing, and NOT as the average interest. If any special ways of financing are connected to a specific object, for example, cheaply financed trucks or cars, the interest pertaining to this situation could be included in cost calculations.

Insurance, design, etc.

Insurance, research, development, design, etc., are relevant for many industries focusing of producing goods for sale. Some example products include: cars, medicine, clothes, building materials, etc.

Research can succeed or fail, and of course the cost of research has to be recovered in the long run. If not in the first attempt then in the next.

Research is an investment, and R&D efforts are not to be included in the production price of the product. These expenditures are referred to as sunk costs.

Overhead "by-one costs"

In a given firm, a number of general costs have a certain status. These are:

o Management and work done by the board of directors

o Consulting and accounting

o IT systems

These elements are prerequisites for the firm's ability to take action, and most often they do not change with a smaller or larger production size. Only when using the "full cost" calculation model are these costs integrated in order to cover these costs. In relation to changes in production, and changes in costs, these factors have no significance.

 
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