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Production, costs, and pricing

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Production refers to every kind of activity or process that gives rise to a particular service, object or product.[1] The term has its origin from the Latin “productĭo,” which means “to make appear” and is related to the action of producing, breeding, creating, originating, and manufacturing.[2][3] When the term refers to an application to something, it means to generate profit.[1]

The production process involves a series of steps and factors that, combined, satisfy the needs of society as demand for goods and services occurs.[4] These are factors such as land, which provide natural resources, the human effort dedicated to the creation of a particular product or service, and capital, which represents the set of goods that serve both to increase the production process and its consumption.[5] The activities that are directly linked to the production process are located in the branches of industry, commerce, agriculture, and transport.[1]

Production is also related to the difference between the volumes of what is produced concerning the consumer goods, because it is what determines the value added to these resources, indicating whether or not there will be profit for the commercial organization.[6]

Production Modes[edit]

For the economy, modes of production are the forms of socioeconomic organization associated with a particular stage of the process of origin of goods and services. They consist of the object with which one works and the means of work identified for production. There are seven main modes of production:

  • Primitive mode of production: This is what designates an economic and social formation based on work and collective ownership of the means of production. It is the oldest mode of production and the one that values the land in the first place.[7]
  • Slave mode of production: In slave society, the means of production and slaves were the property of the master of the land. The slave was considered an instrument, a tool in the care of the Earth. Thus, relationships were based on the principle of dominance and subjection.[5]
  • Asian production mode: It was a predominant mode of production in countries such as Egypt, China, and India and also in Africa of the last century and consisted of the production of slaves and peasants, who were forced to surrender everything they produced to the state.[5]
  • The feudal mode of production: Feudal society was the relationship between feudal lords and their servants. The servants were not slaves, but they served the masters in exchange for food and housing.[7]
  • Socialist mode of production: The economic basis of socialism is the social ownership of the means of production, that is, they are collected and there are no private companies.[8] The purpose of socialism is the complete satisfaction of the material and cultural needs of the population. There is no separation in the relationship between boss and employee.[7]

Technology and production[edit]

Technology is defined as an inventory of known production methods. Production method or process concerns different possibilities for combinations of production factors to produce a given quantity of a good or service.[9] The production function is the technical relationship between the physical quantity of production factors and the physical quantity of the product over a given period. This function assumes that technical efficiency has been met and should not be confused with the supply function, which is an economic concept, since it relates production to the prices of factors of production, while the production function is a more physical or technological concept.[10][11]

The question of time is defined in terms of whether or not there are fixed factors of production, which are those that remain unchanged when demand varies, while variable factors of production change with varying quantities produced.[5] Examples of fixed factors: physical capital, company facilities.[9] Examples of variable factors: labor and raw materials used. Short term is defined as the period in which there is at least one fixed factor of production; In the long run, all factors vary.[7] Total product (PT) is the total quantity produced over a given period.[12] The term average productivity defines the relationship between the level of the product and the quantity of the factor of production in a given product. Marginal productivity, on the other hand, is the change in output given a one-unit change in factor quantity over a given period. Long-term production analysis assumes that all factors of production vary, in the long run, there are no fixed factors of production.[10]

Increasing returns on a scale is when all factors of production grow at the same rate, with production growing at a greater rate.[13] The indivisibility in production refer to the fact that certain units of production can only be operated under economic conditions if they have a minimum scale or size.[12] By increasing the school of operations, production may increase more self proportionally. From a pecuniary point of view, certain research and marketing operations are only possible based on a certain minimum level of production, when they should not entail significant cost increases. Diminishing returns to scale occur when all factors of production grow at the same rate and production grows at a lower rate.[10] A likely reason for declining returns to scale is that the company's expansion may prove a decentralization that can lead to communication problems between management and production lines. If all factors grow in a given proportion, production grows in the same proportion. Average yields of factors of production remain constant.[11]


The definition of costs can be perfectly adapted to everything that concerns economic spending or the provision of certain services.[14] Products generally have a cost that may vary depending on their quality or type. To determine the costs of a product or a service, one must take into account the price of the raw material, the labor used in production and all that entails spending on the supply thereof which determines the costs.[15]

Difference between costs and expenses[edit]

The costs of a company are the expenses directly related to the production or the end activity of an organization, such as the purchase of raw materials, payment of wages, energy bills, among others.[16] Expenses can be considered as bills related to business maintenance. Generally speaking, they are not as fundamental to running a company as its costs.[17] Examples of expenses are: phone bills, administrative salaries, salespersons commissions, etc. It is worth remembering that within the concept of costs and expenses there are two subdivisions of which are responsible for a better classification of them in the daily lives of companies.[14]

Costs classification[edit]

Direct: Any type of investment that is directly linked to the construction of the product or service offered by the company, such as raw material, labor, inputs, among others. They are the easiest to identify.[18]

Indirect: types of investments linked to the production of the goods or services offered, but indirectly. These are items such as maintenance, cleaning, warehouse, logistics, electricity, food and all other manufacturing expenses that do not directly affect the product itself.[18]

It is important to remember that all costs are initially accounted for by the company as an expense. However, this expense will become a cost at the time of use.[19] For example, the raw material purchased was money initially counted as spent and remained so during its storage.[20] However, when it is used in the manufacture of some goods, the raw material is incorporated as an integral part of the item and is considered as a cost of the item.[21] This cost, in turn, is tied to the product until its sale. With this, one can also explain the “cost price”, i.e. the minimum amount that the company pays to manufacture a particular good or provide its service. If the company sells your product or service at a cost price, it will make no profit. It will be based on this cost price that the company will calculate the selling price of what it offers, with the difference between the two being the gross profit per unit sold.[14]

Fixed costs and variable costs[edit]

There are two ways to define costs: fixed costs and variable costs. Fixed costs are characterized by constancy over time.[22] As its name implies, they are fixed costs, which means that they remain constant regardless of the volume of production or sales.[23] The following are considered as fixed costs: security services, telephone plans, rental, equipment maintenance, etc. Variable costs, on the other hand, usually follow the demand of the product in the company. That is, they change over time as production or sales volume fluctuates.[22]

For example, the demand for raw material. If business sales increase, it is natural that one spends more buying more raw material to keep up with the pace of production.[24] Likewise, if sales volume falls.[25] The less one sells, the less raw material one will buy. In addition to the raw material, other costs may vary, such as overtime pay, sales commissions, electricity, and water (the latter two may be characterized as fixed costs, depending on the nature of the business).[23]

It is important to clarify that the division between fixed and variable costs may differ from company to company, depending on the industry and the products offered.[26] It is essential to know the business structure well to identify which expenses are fluctuating and which ones remain constant to identify fixed costs and variables.[24]

The calculation methodology[edit]

To calculate the fixed and variable costs, just add the values of each and, for the cost of production, just add the two results.[27] To know the costing method of a product, there are two known methodologies: absorption costing and variable costing.[28] Costing for the absorption or integral consists of the appropriation of all costs, whether fixed or variable, derived from the use of company resources in the production of products or services. In this form of cost, all expenses related to the manufacture of products are distributed among all products made.[20] In the variable cost methodology, the final value of the product or service will be represented by the sum of all variable costs divided by the number of final products produced or services generated in manufacturing. The fixed cost, in this case, is considered directly in the income statement.[28]


Pricing is an extremely important process in the lives of retailers and business owners who want to make a profit from their business and grow sustainably.[29] Knowing the right price requires a study to combine competitiveness, attractiveness, and profitability for your business.[30] Making a mistake in this product pricing study, or even not giving it due to weight, could be the difference between financial growths or decline.[29]

Why is product pricing essential?[edit]

First of all, it should be understood that it is one of the most important items for your business. And once this is understood you will give enough value to this process.[31]

Pricing for the right price is much more than simple mathematical operations.[32] It is a complex process and therefore should be treated with full attention and care. Managing competitive pricing is what your competitor is surely doing.[33] And just like you and your business, your competitor is also dealing with costs, commissions, taxes, credit card fees, debit payments, cash, and term payments. Because these have a direct impact on pricing.[34] In a nutshell, the price represents the financial value of a product. This entails several items such as competition, taxes, expenses, costs, contribution margin, competitiveness, etc.[32]

Elements of pricing[edit]

Pricing is staying in a competition by balancing growth through a simple strategic routine. Below are the elements of pricing:

Cost: It encompasses the various points for the production or purchase of products, packaging, raw materials, freight, direct or indirect labor, gifts, and taxes.[35]

Taxes and Commissions: Other key factors are the taxes, fees and government charges, marketplaces, sales channels, commissions and awards from the sales staff. That they must never be forgotten so that customers have the right price. Since they are linked too much of the percentage in the products.[34]

Credit / Debit Card / Receivables Advance Fee: In addition to commissions, it is very important to consider how much fee one pays to card companies and payment methods.[31]

Competition: Price is a structured analysis of costs and profit, along with attention to the market and the competition.[33] Thus maintaining competitive prices is of paramount importance for financial health and consequently, stay in the market. For any price, a search is just a few clicks or slips off the screen.[34]


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