Cost of production are the payments made by the firms in the production process. Some of these can be classified as CoP

• Wages and salaries paid to workers
• Taxes paid to government based on what was produced
• Purchase and maintenance of equipment

### Types of Cost

Fixed Cost: These are costs that would paid during production process regardless of what would be produced. Major example would be purchasing equipment for production process, paying of rent, insurance premiums etc

Variable Cost: these are cost that changes when the level of output changes. Examples are cost of raw materials, paying wages of labourers etc

Total Cost: This refer to the sum of fixed cost and variable cost.

Average Fixed Cost (AFC): This is a cost per unit of good produced. As a firm produces more output, its fixed cost is divided by the quantity that has been fully produced.

It is calculated as AFC= Fixed Cost / Output

Average Variable Cost (AVC): This is the variable cost of production per unit of output. It is calculated by dividing variable cost by output produced.

AVC= variable Cost / Output

Average Total Cost (ATC): This is popularly known as cost per unit which refers to the total cost of making one product. This is the cost of a producing one product.

ATC= Total Cost / Output

Revenue is the amount sold multiplied by the price per unit sold. Revenue from sales is known as turnover.

Total Revenue = Price per unit * quantity sold

Profit or Loss = Total revenue – Total cost.

If total revenue exceeds total cost a firm will make a profit. Profit is therefore maximized when the difference between total revenue and total cos is the greatest. However, if the total revenue does not cover the total cost, a firm will make a loss and if it continues the business will go out of business.

Break Even level of output is that level of output which if sold total revenue will equal total cost.at break-even point a firm will neither make a profit or a loss.

The break-even level of output can be found graphically where the total revenue line crosses the total cost curve. At break-even point a firm is able to cover all its cost and can remain in business for certain number of years.