Introduction to a production plan
A production plan is another important element in a business plan. A production
plan is prepared with the aim of calculating the production cost and the cost per one
unit of the product.
You have already studied the marketing plan. There, the entrepreneur estimated the
quantity of goods or services that he/she expects to sell. The next step is estimating
the cost for producing that quantity of goods or services. This requires a production
plan.
When producing any good or service, it is necessary to incur a cost. For instance,
think of your exercise books. When producing exercise books, you will initially
need paper, stapler pins and printed covers. You will also need machinery for cutting
up and binding the books. In addition, you need employees to do all the work.
All of these result in some cost. When a large quantity of goods or services is
produced, you will need more material and more workers, and the cost will increase
as well. Therefore, a proper production plan must be prepared, taking all the
expenses into account.
A production plan is the document estimating the cost for a number of production
units.
Information included in a production plan
Production process
Production fixed assets
Production cost ( Material, Labour, Other costs )
Unit cost
Production process
Production process describes how the goods or service will be produced. This
includes details on what kind of input will be used, what changes will be made
to the input, and what the final product will be. Here, input refers to the resources
needed to produce some goods or service.
Production fixed assets
Buildings, machinery, equipment etc that are used long term, again and again in the
production process are known as production fixed assets.
Production cost
Production cost refers to the total cost incurred for material, labour and other
expenses (production overheads) during the production of a product.
Production cost = material + labour + other expenses
Material and material cost - The input used in producing any goods or service is called material. The money
spent on the material is the material cost.
Labour and labour cost - The process of converting input into output requires human labour. A payment must
be made for labour, and this can be identified as labour cost. These payments are
called salary and wages.
Other expenses incurred in production - Apart from the above, there are other expenses which are incurred through production
activities. Such expenses can be taken as other expenses incurred in production.
In a manufacturing plant, electricity used for lighting, salary for the security guard,
insurance coverage for the plant, depreciation of fixed assets etc are examples for
other expenses.
Unit cost of production
When the total production cost is divided by the number of units produced, we get
the production cost of one unit.
