Cost of production

When you buy something, what were the costs that went into it?

Most people would say raw materials and labor, plus profits. I say this is incorrect.

The real cost of anything can be broken down into just Labor, Taxes, Profits, Rents (including Royalties and interest), and the depreciation incurred  on capital. Of these, labor is usually the largest by far.

Raw materials are free. The raw materials existed freely before man even mastered fire. Sure, GM has to buy steel products, and yes they treat that as a raw materials expense. However, the cost of that steel was the labor it took to mine the iron ore and other metals, the profits from the sale, a portion of the taxes paid by the steel companies, and the various rents and depreciation cost paid by the steel companies.

Capital equipment also reduces to the above category.  A lathe for instance is simply the product of the labor required to create it, taxes, profits, and so forth. However only the portion of that capital equipment that was used up (depreciation) is part of the actual cost of the goods made with it.

This same analysis can be done at every step of the supply chain, no matter what the goods or services. In some cases, the profit is the dominant expense. For instance, it costs only about $1.00 to extract a barrel of oil from the ground in Libya resulting in huge profits for Khadafi. In the majority of other cases though, its labor that predominates. This is important to know because a very large proportion of all money spent goes to pay for someone else’s labor, whether it be a janitor, a lumberjack, a steelworker, or a security guard.

Taxes make up about 37% of the price of an item also, even when not including sales tax.  Since every business must pass along any taxes it must pay to its customers, the final price of an item must include a portion of the business taxes of every business involved in the product.  For instance, there is a 15% Federal excise on vehicle tires.  The trucking company that delivers materials to a manufacturing plant passes this tax along to its customer in the form of higher prices.  Even the cost of labor includes taxes which must be passed on. The point is that all business tax is paid for by the consumer, and although the average Joe likes to see the the greedy corporations get higher taxes, Joe is the one who is actually paying the bill.

Business profits are typically in the 8% to 9% range according to the IRS, except for the banking industry where the profits are reported at 19% to 20%.

The cost of anything made includes all the costs of its components, and those costs all reduce to labor, taxes, profits, interest, and rents / royalties.

So, the next time someone tells you it only took $2,000 worth of labor to build that new car; or taxing businesses does not impact the man on the street; you should know that to be untrue and be able to explain why.

It should also be evident why the US cannot compete against other countries in the global marketplace, as evidenced by our dismal balance of trade. The global economy will cause an equalization of labor rates world wide eventually, and that means Americans will end up on the losing side of that equation. Along with that equalization will come decreased standards of living, lower life expectancies, and no doubt a further erosion of our civil rights.

This entry was posted in Economy, Science and tagged , . Bookmark the permalink.

Comments are closed.