Factors Influencing Cost of Production Three Major Factors

Introduction: An entrepreneur has to take some very important decisions before setting up a new venture. These decisions have close bearing on the cost of production of the product in the long run. He has to decide the site of the works, the nature of production, scope and size of the market that will be served and the size of the plant. All these decisions are of such nature that once taken cannot be altered time and again. All these decisions affect the cost of production in the long run. The entrepreneur, therefore, should study the various forces (factors) which may affect the cost behaviour in the long run. Generally there are three types of factors which influence the cost of production e.g. I. Location, II. Scope, and III. Size A complete analysis of these factors, will certainly help the entrepreneur to earn maximum profits by reducing the costs.

I. Location Availability of raw materials: The place selected should be such where the raw materials are available easily. There should be an easy approach to the place of raw materials. The success of an enterprise is enhanced on the account of easy availability of raw materials. It reduces the cost of transportation.

Location Nearness to the market: Manufacturing a thing successfully is not sufficient. It is also necessary that the output should find ready market and that the product is sold at a price to yield reasonable profit. This is possible only when the market is not far away. Nearness of the market ensures transportation cost less and minimum wastage.

Location Nearness to source of operating power: Every industry requires fuel for working the machinery and unless the region has rich fuel resources it cannot develop an industrial area. Various sources of power now available are coal, hydro-electricity and oil etc. Coal is the cheapest source of power, but it is very bulky and involves high transportation costs.

Location Labour Supplies: For the successful and uninterrupted working of a farm, availability of adequate supply of labour of the right type at reasonable wages is also very essential. There are some industries in which the inherited skill of the workers is an important factor in the process of manufacturing. The development of the Santa Fe Farm in the Rupununi has been mainly due to contracting labour and taking it there from Lethem and Brazil due to the need for skilled labour.

Location Transportation: Every agricultural industry requires cheap and efficient means of transportation for the movement of both raw materials from the source of supply to the farm or processing plant and finished products from the farm/processing area to the markets or the centres of consumption. The location of the plant, should therefore, be at a place where adequate transport facilities are available at cheaper rate. Efforts should always be made towards bulk shipments.

Location Finance: No productive activity is possible without the availability of adequate capital. Banks, Funding institutions and other similar institutions help in capital formation and expansion of industry by providing financial help to it from time to time.

Location Climate: Certain industries for their successful working require a special type of climate. For example, cotton textile industry requires humid climate while the rice cultivation is dependent upon seasonality and the support of infrastructure of drainage and irrigation Climate also affects the efficiency of labour.

Location Industrial inertia or momentum of early start: There is tendency for an established industry to remain localized in a particular area in which it arose even after some of the original advantages possessed by that area for such work have lost their previous importance. If, however, the entrepreneur acts rationally and has necessary knowledge, he will choose the location which offers the lowest cost per unit of output

Location Personal Preferences: Location of any industry may sometimes be decided according to the personal preferences and prejudices of the industrial enterprises.

Location Government Policy: These days the government plays an important role in determining the location of new industries. In addition to the factors discussed above, cost of land and building for setting up the factory, topography of the area, the possibilities of future expansion etc. are some other factors which influence the decision making regarding location of industry.

II. Scope It is advisable to plan before hand the scope of activities of the firm beforehand. On the basis of further experience the plan may be revised from time to time in deciding about the scope. The following points should be taken into consideration in this regard- (i) What techniques have to be followed in production? What parts have to be manufactured in the factory itself and for what parts should depend on other firm? (ii) Should all the processes involved in the production be carried in the factory or some have to depend upon contracts? (iii) Does the firm to produce the raw materials itself or should it depend upon other firms? (iv) How far the firm should specialize in production or should it depend upon other firms? (v) Should all the connected goods with the main product be manufactured by the firm itself and the business scope be expanded?

II. Scope (vi) Should the marketing of the product be organized by the firm itself or should it depend upon other agencies for marketing? (vii) Should the after-sale service to the consumers be undertaken by the firm itself or should firm enter into some agreement with other firm for this important responsibility? The firm has to take decision on the above question and other allied problems finally setting up the unit keeping in view that the unit cost in producing and distributing of the product or service should be the lowest and the changes of making maximum profits are the brightest.

III. Size The success and efficiency of the firm also depends on its suitable size. The size of the firm should be optimum as to ensure maximum profitability. The optimum size of the firm is that point which results in the lowest production cost and maximum efficiency. At this optimum point of output all the technical, managerial marketing factors are well balanced. It should be noted that optimum size of the firm is not fixed but goes on altering with the improved techniques of production and managerial experience.