Prime Cost of Production

Prime Cost of Production


the monetary (resource) expenditures of socialist enterprises on the production and sale of output, representing part of the value of the output (the value of the means of production consumed and the value of the necessary product). The prime cost—one of the important, generalizing, qualitative indicators of the efficiency of socialist production under the conditions of economic accountability—makes it possible to exercise control over expenditures of living and embodied labor and to assess the results of the economic activity of an enterprise. The ratio of net income (profit) to prime cost expresses the profitability of production.

In planning it is the practice to calculate the prime cost of the entire output (in terms of the economic elements of expenditures) and that of a unit of goods (in terms of expenditures included in the cost calculation). The economic elements of the expenditures, which reflect the value of the expended means of production and the value of the necessary product used for wages, include raw products and basic materials (excluding wastes), purchased preassembled articles and semifinished products, auxiliary materials, fuel and energy, amortization of the fixed production assets, wages (basic and supplementary), and deductions for social security. The relationship between particular types of expenditures constitutes the structure of the prime cost, which differs sharply both among and within the individual national economic sectors.

Under the influence of scientific and technological progress and as a result of the growth of labor productivity, there has been an increase in the proportional expenditures of material resources in the prime-cost structure and a decrease in the share of monetary outlays for wages. Thus, in Soviet industry in 1928–29, wages and deductions constituted 34.3 percent of the total expenditures, and material outlays, 55.6 percent. In 1960, the corresponding figures were 19.3 and 77.5 percent; in 1970, 16.1 and 80.7 percent; and in 1974, 14.8 and 80.8 percent. The grouping of outlays in terms of expenditures included in the cost calculation makes it possible to determine the prime cost of a unit of output, reveal the factors influencing the formation of the prime-cost level, and discover reserves for reducing this level (seeCOST CALCULATION).

Table 1. Expenditures for producing output in the industrial sectors in 1974 (current prices, percent of total)
 Total expendituresRaw products and basic materialsAuxiliary materialsFuelEnergyAmortizationWages with deductionsOthers
Total industry ..........10064.
Electric power ........1005.453.50.422.611.96.2
Oil extracting .........1005.42.010.536.49.136.6
Gas ...............10031.
Coal ...............10033.
Ferrous metallurgy......10056.
Machine building and metalworking........10057.
Light industry.........10086.
Food ..............10085.

All the expenditures of an enterprise related to the manufacture of a product are production expenditures. Taken together, they constitute the factory-plant prime cost. In the process of economic activity, an enterprise also incurs nonproduction expenditures for product sales (including transportation outlays) and the maintenance of superior organizations, for example. The factory-plant prime cost, together with all the nonproduction outlays, constitutes the full prime cost of production.

A distinction is made between plan prime cost and report (actual) prime cost of production. The basic plan indicators of the prime cost of production are expenditures per ruble of commodity (sold) output, the prime cost of particular types (groups) of output and services, the level and structure of the prime cost of production in terms of elements of expenditures (the estimate of production expenditures), and a reduction in the prime cost of comparable commodity output and its specific types. Reports in terms of the prime cost of production stipulate the indicator of actual outlays per ruble of commodity output and final data for the prime cost of commodity output (including comparable commodity output).

Since 1966, the prime cost of production has been planned as a calculated indicator in the state profits plan and approved in the enterprise technical, production, and financial plan (tekhpromfinplan). Since 1975, in sectors where it is expedient, plan targets for a reduction in the prime cost of production have replaced profitability targets.

The prime cost of production takes shape directly at an enterprise. It reflects the production expenditures and conditions, as well as the specific results of the economic activity of a particular production group. Therefore, the prime cost of the same type of product varies at different enterprises. The base in price formation is generally the average sectoral prime cost, which represents the weighted mean sectorwide expenditures for producing a particular type of output. In certain industrial sectors, such as the mining sectors, the average zonal prime cost is used in setting wholesale prices.

In agriculture there are specific conditions for the formation of the prime cost of production. Since 1958, an estimate of production expenditures has been drawn up on the sovkhozes and kolkhozes, the prime cost of raising crops and livestock has been calculated, and the overall level of expenditures for particular types of work has been computed. The basic plan indicators are expenditures per ruble of gross (commodity) output, standard expenditures calculated per hectare of planted area and per head of livestock, and the prime cost of the most important types of output. The standard list of expenditure items includes basic and supplementary wages, with deductions for social security on the sovkhozes, and wages with deductions into the centralized Union social security fund on the kolkhozes; amortization of the fixed means of production; current repairs; and general production and general farm expenditures. In raising crops the prime cost of production includes expenditures for seed and planting stock, fertilizers, and fuel and lubricants. In livestock raising the prime cost of production includes the cost of feed, water, and electricity.

In accounting for and planning the prime cost of production on the kolkhozes and sovkhozes, a uniform system of indicators is used. The indicators for kolkhozes and sovkhozes differ primarily with regard to wage expenditures. The level of wages and the wage fund of the sovkhozes are planned by state bodies. The kolkhozes independently set the amount of deductions for wages and establish the level of wages in terms of categories of workers, based on the guaranteed minimum and the results of production activities. In calculating the prime cost of production the kolkhozes use two methods for determining the level of wages. In some instances they plan the actual expenditures for wages, and in others the prime cost of production is determined as a provisional sum, in terms of the wage rates for sovkhoz workers. The provisional prime cost is used primarily for economic analysis.

The expenditures on basic output, conjugate output, and output of by-products are also calculated by different methods: according to the established coefficients; in proportion to the value of the conjugate types of output, based on selling prices; and by excluding from the total expenditures the value of the output of by-products, calculated in terms of set prices. In determining the value of the basic and conjugate output, the unused output of by-products is not taken into account.

The prime cost of production makes it possible to compare the economic efficiency of enterprises producing different output and operating under different technical and economic conditions. Analysis of the dynamics of the prime cost of production reveals the existence in socialism of an inherent, objective pattern of systematic reduction in the overall level of production outlays. (The change in expenditures per ruble of industrial commodity output is summarized in Table 2.) The labor expenditures for the production of 1 quintal of basic agricultural output have also declined systematically. There has been a drastic decline in direct labor expenditures in man-hours for the production of 1 quintal of grain (excluding corn) (see Table 3). At the beginning of the 1970’s a 1 percent reduction in production outlays in agriculture meant savings of about 0.5 billion rubles.

Table 2. Change in expenditures per ruble of industrial commodity output (comparable prices, percent of preceding year)
1966 .......................................–0.8
1967 .......................................–1.4
1968 .......................................–0.9
1969 .......................................–0.9
1970 .......................................–1.0
1971 .......................................–0.5
1972 .......................................–0.6
1974 .......................................–0.4

Owing to the reduction in the level of the prime cost of production, there has been an increase in the internal production sources of accumulation and an acceleration of the growth rate of expanded reproduction and the growth of the productive forces. At the same time, the reduction in the prime cost of production has served as the basis for a planned reduction in wholesale and retail prices, for an increase in the incomes of the working people, and consequently, for a continuous increase in their material and cultural level.

Table 3. Direct labor expenditures per quintal of grain (excluding corn) (in man-hours)
1960 .......................6.72.0
1965 .......................4.72.4
1970 .......................1.91.2
1973 .......................1.51.1

The struggle to increase the output of the national economy while systematically reducing the level of the prime cost is the principal emphasis in nationwide socialist emulation, which has developed under the slogan of “producing more output of higher quality with lower expenditures.”

The decisive factors for reducing the prime cost of production in the national economy are an increase in labor productivity, economies in embodied labor through better utilization of the means of production, and a decrease in material intensiveness, accompanied by continuous improvement in product quality. In the early 1970’s, each reduction of 1 percent in material expenditures in the national economy represented more than 4 billion rubles. A continuous reduction in the prime cost of production is achieved on the basis of scientific and technological progress, improvements in the implements of labor, and the mechanization and automation of production, as well as its concentration and specialization. Improved production management and organization are assuming greater significance, as are the intensification of production processes and the increasing effectiveness of economic accountability and socialist management methods.


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