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To recall, we started with Logistics and its components that go into making logistics an inevitable part of management and today, without logistics no business worth the name can hope to survive and sustain itself. We also spent some time on the evolution of logistics with its integral parts; we looked into Demand forecasting, Purchasing, Requirement planning and production planning. We have looked into the objectives and necessities of production planning beginning with effective utilization of resources and reaching up to consumer satisfaction.  Now, we have to spend some time on the last objective of production planning:  Reduction in the production costs.

By planning optimum utilization of resources and minimizing wastage along with a focus on optimum size of inventories, production planning tries to achieve effective reduction in production costs.

First, what is production cost? A good business man must be all the time aware of the production cost to calculate the profit his company makes after sale. How much money a business puts into manufacturing a good or providing service is the production cost. Naturally, depending on the kind of business, production cost involves a huge variety of expenses like the salary and wages you pay to labour, the money you spent on raw materials, the cost of machineries you need to manufacture the good the company markets and so many general overheads.

The unit cost of production can be arrived at by dividing the total cost of the units produced during the day by the number of units produced for the day.  Here, we must also understand the difference between the manufacturing cost and the production cost.  Production cost includes all the expenses in connection with business activity of the organization; but, manufacturing cost includes only the expenses of actually producing the product.  For example, the advertising budget comes under production cost while the cost of the raw materials comes under manufacturing cost, to put it simply. These two costs put together point to total expenses of operating the manufacturing company and the income, the revenue it generates must exceed the total expenses if the company aims at achieving profitability.

We will see more of it in our next session. 

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