Production Functions, Processes, and Cost Efficiency
Functions of the Production Department
The production function directs the company’s production.
- Procurement: Provides the necessary materials for production.
- Manufacturing: Manages the production process, transforming productive factors into a final product.
- Storage: Organizes all the materials that exist on the company’s premises, whether used in the manufacturing process or sold to customers.
- Quality Control: Verifies that the product produced has the characteristics desired by customers.
Relationship with Other Departments
The relationship with other departments may change depending on the company’s size and activities.
- Sales: The products manufactured by the production department must be sold by the sales department.
- Finance Department: Investment in machinery and installations must be approved and funded by the finance department, which will consider its advisability.
Value Added
Value added is the sum of the value added to supplementary raw materials, which are separated by a lower value than when combined in a final product.
Technology
Technology is the way factors of production are combined to achieve a product. Every time there is a change in the way these resources are combined, technological change occurs.
The Production Process
The production process is the global system that characterizes a productive activity.
Temporary Classification According to Haritz
- Continuous Production: The transformation of production factors into products is a continuous flow without interruption (e.g., smelters, refineries, cars).
- Intermittent Production: Does not require continuity in the production process, mainly because it is a very established product (e.g., public works, construction).
Classification According to the Productive Procedure
- Manual Production: Production is done with human effort alone.
- Mechanized Production: Strikes a balance between manual work and machinery in the division of labor.
- Automated Production: Human intervention is minimal, only supervisory and monitoring tasks.
Classification According to the Type of Product Obtained
- Series Production (Simple Process): A unique product with similar characteristics is obtained.
- Individual Product (Multiple Processes): Several different products are obtained.
The Production Function
The production function is a representation of the quantity produced of a product in relation to the production factors used.
Yields of Production and Productivity
The performance of a production process is the relationship between the quantity produced and the quantity of production factors employed.
Productivity = Total Production Value / Cost of Production
- Decreasing Returns to Scale: If the increase in production is less than the increase in the use of productive factors.
- Constant Returns to Scale: If the increase in production is in equal proportion to the increased use of productive factors.
- Increasing Returns to Scale: If output increases in a greater proportion.
Production Efficiency
- Technical Efficiency: When a technology produces the same amount of a product as another technology, but uses fewer units of production factors.
- Economic Efficiency: Choosing the technology that will produce at the least cost, i.e., the cheapest way.
Fixed and Variable Costs
- Fixed Costs: Those that are independent of production levels; they do not change if the amount produced varies.
- Variable Costs: Those that are proportional to production levels; they increase or decrease if the quantity produced increases or decreases, respectively.
Total Cost (TC) = Fixed Costs (FC) + Variable Costs (CV)
Allocation of Costs: Direct and Indirect Costs
- Direct Costs: Those that are directly related to the production of a good.
- Indirect Costs: Those that affect the entire production process in general and cannot be mapped directly to a product.
Cost Estimation Techniques
- Full-Costing System: The cost of production is the sum of all direct costs and the proportionate share of the monthly or fixed indirect costs attributable to the product.
- Direct-Costing System: The cost of production is the sum of direct and variable costs, i.e., those that can be assigned to a product without using an attribution criterion.
The Break-Even Point
The break-even point is the amount of production and sales from which profits begin to be made.