Production Cost Methods

Fixed and Variable Costs

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Fixed cost

Fixed cost is the cost that is constant despite the level of operations. Variable cost is the cost that alternates depending on the level of operations. Ford Motors has both the fixed and variable costs. According to Warren (2017), taxes, license fees, salaries and rent/lease are some of the fixed costs. Taxes are set to be a certain percentage of the income that Ford Motors will raise. The percentage has a constant effect on the amount that remains after the taxes. The licenses fees are paid on an annual basis for the firm to be allowed to operate. The license fee is a constant figure that is adjusted based on the level of the inflation on the economic. Salaries to employees are set to be a certain amount and employees are paid the agreed figure on a monthly basis. Rent or lease figures for the buildings the firm has entered to use with their owners for a certain period is fixed (Warren, 2017).

Variable cost

Commissions, transport cost, electricity bills, water bills, wages and storage fees are some of the variable costs. The amount paid for this expenses changes from month to month. The commission is the amount paid to salespersons and agents and is dependent on the level of sales of Ford products made. Hence, the commission is bound to change based on the level of sales made. Transport cost is based on the amount of shipment being made. Warren (2017) noted that shipment is determined by the level of demand. It is bound to happen that at times the transport cost is low when demand is low and high when the demand increases. Electricity and water bills are dependent on the level of operation increasing when activities are many. Wages is the amount of amount that goes to contracted employees and the number of workers varies depending on the level of activity. The higher the level of the activity the lower the impact of fixed cost on the total cost with variable cost being the higher cost eventually reducing cost per unit produced.

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