Page 207 - Cambridge IGCSE Business Studies

15: Production of goods and services

All of the ways of improving productivity will add to a business’s costs, for
TOP TIP example the cost of training programmes, introducing schemes to motivate
Productivity should always be workers or purchasing new machinery. The main reason for improving

linked to the effect on cost per productivity is to reduce unit costs, so the increase in output must be greater

unit of output. They will move in
than the increase in costs.
opposite directions. A business
will always want productivity to
rise because this will mean a fall Why businesses hold inventories
in cost per unit.
Almost all businesses hold inventories (stocks) of:
■ raw materials and components – these are needed as inputs for the production
process
■ work-in-progress, that is part-finished goods that have not yet completed the
KEY TERM
production process
Inventories: the stock of raw ■ finished goods ready to be sold or sent out to customers.
materials, work-in-progress and
finished goods held by a business.

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Inventories

Holding inventories adds to a business’s costs, such as:

■ Warehousing costs – the business will need to rent or purchase a warehouse to
store the inventories.
■ Handling costs – inventories need to be moved into and out of the warehouse.
■ Shrinkage costs – damaged, lost or stolen inventories will need to be replaced.
■ Insurance costs – these will cover the cost of losses from shrinkage.
Opportunity cost: see ■ Obsolescence – the business may not be able to sell out-of-date goods.
Chapter 1, page 12. ■ Opportunity cost – working capital is ‘tied-up’ in inventories which could be used
more profitably by the business.