Relevant Costs:

Four costs are relevant to aggregate production. These relate to the production cost itself with the cost to hold inventory and to have unfilled orders. More specifically these are following:

Basic Production Costs

These are the fixed and variable costs incurred in generating a given product type in a given time period. Included are direct & indirect labour costs & regular plus overtime compensation.

Costs Associated with Changes in the Production Rate

Typical costs in this category are those involved in hiring, training, and laying off personal. Hiring temporary help is a means of ignoring these costs.

Inventory Holding Costs

A major component is the cost of capital tied up in inventory. Other components are insurance, storing, spoilage, taxes and obsolescence.

Backordering Costs

Usually these are extremely hard to measure and include costs of expediting, loss of customer goodwill, and loss of sales revenues resulting from backordering.