Production costs refer to the expenses incurred in the process of creating goods or services. These costs can include materials, labor, and overhead expenses such as rent and utilities. Understanding production costs is essential for businesses to set prices and manage budgets effectively. There are two main types of production costs: fixed costs and variable costs. Fixed costs remain constant regardless of the level of production, such as salaries and equipment leases. In contrast, variable costs fluctuate with production volume, like raw materials and hourly wages. Managing both types is crucial for maintaining profitability.