The main purpose of the enterprise in conditions of market is getting the maximum possible profit. However, the realization of this task to limit the economic costs and the demand for manufactured products. In certain cases the company may even go for a temporary reduction in income or loss. Such situations arise, for example, in the process of conquering space on the trading floor in a competitive environment and so on. Consider next, what are the economic costs.
For a long time, an enterprise cannot exist without income, since in this case it will not be able to withstand competition. Due to the fact that economic costs are the main limitator of profits and the main factor that influences the volume of supply, the adoption of certain management decisions by management is impossible without analyzing existing production costs and forecasting their size in the future. This applies to the development of already developed goods, and to the release of new ones. As a rule, costs are associated with certain casualties, losses that must be borne to obtain a useful result. Such losses can be quite diverse. In this regard, there is no one simple and universal way to determine costs. However, two approaches are used to interpret costs. Each of them covers a specific area.
Economic and accounting costs
In accordance with the first approach, the cost is the cost of resources spent, expressed in the actual cost of their acquisition. Such costs are called accounting.
According to another approach, the costs represent the value of other benefits, which the company could obtain if more beneficial to use the same resources. In this case we are talking about alternative economic costs.
Evaluation of the company
In the analysis of decisive importance have the alternative economic costs. This category is one of the fundamental concepts in theory. Such economic costs arise in conditions of limited resources. In this regard, not all the needs of people can be met. If the materials were in unlimited quantities, then no action would be performed at the expense of some other. In other words, the opportunity costs would be 0. In the real world, with limited resources, they are positive. Strictly speaking, in economic theory, costs are always alternative.
If for an accountant the cash costs of acquiring the resources necessary for production are important, then for an economist these figures may be an inaccurate reflection of costs if, for whatever reason, the market does not provide an assessment of the materials at the highest value of their alternative use. At the same time, the latter tries to take into account all the benefits that have been sacrificed in the implementation of procurement. Consider an example.
The plant produced penoplen, diverting part of the circulating capital from the issue of adhesive sealant. Due to certain reasons, the company refused to issue penoplena. Resources were invested in the production of sealant. As a result, the company received a profit.
Internal and external costs
If you rely on the notion of alternative costs, then the economic costs can be represented in the form of payments that the company must make, or those revenues that it must provide to the supplier of materials to divert these resources from use in alternative production. Such payments can be both external and internal. The first includes the costs that the company bears from its own sources to pay for the supply of raw materials, fuel, electricity, labor and transport services. In other words, external economic costs are the costs of the resources of suppliers who are not owners of the company.
Along with this, the firm can use materials which belong to it. Regardless of whether resources are property of the company or taken it for rent, that their introduction is accompanied by costs. The cost of a private and independently of the materials used represent the internal costs. From the point of view of these economic costs are the payments which could deal with the best available ways to use resources.
Variable and fixed costs
In the production process, different economic costs will be different. The fixed costs include those costs incurred for the maintenance of structures, major repairs, land rent, depreciation, administrative and management activities, salary payments to service personnel, advertising, insurance, credit payments, and so on. Their constancy is defined in the sense that the amount of these costs for a short time is unchanged and does not depend on the volume of production. They exist when goods are not produced at all.
Variables are those economic costs, the magnitude of which varies and depends on a decrease or increase in production. The costs of this category include the cost of labor, electricity, raw materials, auxiliary materials and so on. Variable costs, in contrast to fixed costs, increase in proportion to production. At the first stages of activity, these costs increase faster than the volume of output. Upon reaching the optimal indicators of output, the growth rate of these costs gradually decreases. At the same time, the subsequent expansion of production again leads to an increase in variable costs.
These economic costs reflect the total costs per unit of product. With increasing production volume fixed costs per unit will decrease. In this regard, the average cost curve has a negative slope. Such costs are determined by the formula AFC=FC/Q. When reaching the optimal production volume of the average variable cost becomes minimal. It is calculated by the formula AVC=VC/Q.
Average costs AVC are of particular importance in assessing the economic condition of the company. In particular, the analysis of its balance and future prospects of development, reduction, expansion or withdrawal from the market. As average total costs, one should take the quotient derived from dividing the total expenditure on the volume of output. For calculation used the formula ATC=TC/Q. average costs can be obtained by addition: ATC=AFC AVC.
In some cases, the analysis of the state of the enterprise average and total costs is not enough. In this regard, the marginal costs (MS) are also used in the calculations. They represent an increment of the total cost of the release of an additional unit of goods relative to the calculated or actual production. This category has a strategic value, as it allows us to illustrate the costs that the company will incur when releasing another (unplanned) product. Marginal costs also show how much a company can save if it cuts production by one unit of goods.