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BUS 207 (14)
Chapter 5

Chapter 5 Vocab and Notes

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Business Administration
BUS 207
Karen Ruckman

Managerial AccountingChapter 5 Production Production and cost are closely linkedThe production manager strives to produce any given level of output at minimal total cost and continually seeks less costly ways to produce the firms goods and servicesBASIC PRODUCTION CONCEPTS Production Technology Production transforms inputs into outputsIt is convenient to refer to two main categories of inputs labour and materials and longterm capitalo Labour and materials includes production workers marketers and managers at all levels as well as raw materials and intermediate goods including parts water electricity etc o Capital includes buildings equipment and inventoriesThe firms Production Function indicates the maximum level of output the firm can produce for any combination of inputs QF LK Example o This states that the firms quantity of output depends on the respective quantities of labour L and capital Ko The firms production function specifies the maximum output for a given combination of inputs it assumes that managers use inputs efficientlyPRODUCTION WITH ONE VARIABLE INPUT ShortRun and LongRun ProductionIn the Short Run one or more of the firms inputs is fixed cannot be variedIn the Long Run the firm can vary all of its inputsThere is no universal rule for distinguishing between the short and long run the dividing line must be drawn on a casebycase basisInputs that cannot be changed in the short run are called Fixed InputsExample A firms production facility MARGINAL PRODUCTVariable Inputs are inputs that can be freely varied Example LabourThe Marginal Product is the additional output produced by an additional unit of labour all other inputs held constantExample Mathematically labours marginal product is MPdQdL labours Lmarginal product is the change in output per unit change in labour inputo Increasing the number of workers allows for specialization of labour workers devoting themselves to particular tasks which results in increased output per worker o When MP is large the total product curve is steep Lo As MP declines the curve becomes less steep Lo The product curve peaks when MP approaches zero and begins to decline Lwhen MP becomes negative L
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