The goal of any enterprise is to earn the maximum profit, which is calculated as the difference between income and total costs. Therefore, the financial result of the company directly depends on the size of its costs. This article describes the fixed, variable, and total production costs and how they affect the current and future activities of an enterprise.

## What is the cost of production

Under the cost of production imply the cash costs of the purchase of all factors used to manufacture products. The most effective way of production is considered to be the one that has the minimum value of expenses for the release of a unit of goods.

The relevance of the calculation of this indicator is associated with the problem of limited resources and alternative use, when the used raw materials can be used only for their intended purpose, and all other ways of their use are excluded. Therefore, at each enterprise, the economist must carefully calculate all types of production costs and be able to choose the optimal combination of factors used so that costs are minimal.

## Explicit and implicit costs

Explicit or external costs include expenses incurred by an enterprise at the expense of suppliers of raw materials, fuel, and service counterparties.

The implicit, or internal, costs of an enterprise are the revenues lost by the firm due to the independent use of its resources. In other words, this is the amount of money that an enterprise could receive with the best method of applying the available resource base. For example, to divert a specific type of material from the production of product A and use it to manufacture products B.

This division of costs is associated with different approaches to their calculation.

## Cost calculation methods

In economics, there are two approaches that are used to calculate the sum of production costs:

1. Accounting – costs of production will include only actual expenses: salaries, depreciation, social contributions, payment for raw materials and fuel.
2. Economic – in addition to the real costs, production costs include the cost of missed opportunities optimal use of available resources.

## Classification of production costs

There are these types of production costs:

1. Fixed costs (PI) – the cost, the amount of which does not change in the short term and does not depend on the volume of manufactured products. That is, when the increase or decrease of the production value of these costs will be the same. Such costs include wages of staff, rent.
2. Average fixed costs (AVC) is constant costs, which fall per unit of manufactured products. They are calculated according to the formula:
where O is the volume of production.

This formula implies the dependence of the average costs to the number of manufactured goods. If the firm will increase production volumes, overhead costs, respectively, will decrease. This pattern serves as an incentive to expansion.

3. Variable production costs (CI) - costs that depend on production volumes and tend to change with a decrease or increase in the total number of manufactured goods (wages of workers, costs of resources, raw materials, electricity). This means that with increasing scale of operations, variable costs will increase. At first they will increase in proportion to the volume of production. At the next stage, the company will achieve cost savings with higher production. And in the third period, due to the need to purchase more raw materials, variable production costs may increase. Examples of such a trend are frequent transportation of finished goods to the warehouse, payment to suppliers for additional batches of raw materials.

When making calculations, it is very important to distinguish the types of costs in order to calculate the correct cost of production. It should be remembered that the variable production costs do not include rent for real estate, depreciation of fixed assets, equipment maintenance.

4. Average variable costs (Spri) is the sum of the variable costs for an enterprise for production of unit of product. This figure can be calculated by dividing total variable costs by the volume of manufactured goods:

The average variable cost of production does not change with a certain range of production volumes, but with a significant increase in the quantity of manufactured goods, they begin to increase. This is associated with large total costs and their heterogeneous composition.

5. Total costs (OI) - include fixed and variable production costs. They are calculated by the formula:

That is, it is necessary to look for the reasons for the high total costs in its components.

6. The average total costs (SDI) - show the total production costs that fall on a unit of product:

The last two indicators increase with the growth of production volumes.

## Types of variable costs

Variable costs of production do not always grow in proportion to the rate of growth of output. For example, the company decided to produce more goods and this introduced the night shift. Payment for work at such time is higher, and as a result, the firm will incur considerable additional costs. Therefore, there are several types of variable costs:

• Proportional – these costs increase at the same pace with the volume of output. For example, if you increase production by 15% for the same increase and variable costs.
• Regressive - the growth rate of this type of cost lags behind the increase in the volume of goods; for example, with an increase in the number of manufactured products by 23%, variable costs will increase only by 10%.
• Progressive variable costs of this type increase faster than the growth of production volume. For example, the company increased its production by 15% and costs increased by 25%.

## Costs in the short term

The short-term period is the period of time during which one group of factors of production is constant and the other is variable. In this case, the stable factors include the area of ​​the building, the size of buildings, the number of used machinery and equipment. Variable factors consist of raw materials, the number of employees.

## Long-term costs

A long-term period is a period in which all production factors used are variable. The fact is that for a long period any firm can change the premises to more or less, completely renew the equipment, reduce or expand the number of enterprises controlled by it, adjust the composition of the management personnel. That is, in the long run, all costs are considered as variable production costs.

When planning a long-term business, an enterprise should conduct a deep and thorough analysis of all possible costs and make up the dynamics of future expenses in order to reach the most efficient production.

## Average costs in the long run

The company can organize small, medium and large production. When choosing the scale of activity, the firm must take into account the main market indicators, the projected demand for its products and the cost of the necessary production capacities.

If the product of the company is not in great demand and it is planned to produce a small amount, in this case it is better to create a small production. Average costs will be significantly lower than for large output. If the assessment of the market showed great demand for the product, then the firm is more profitable to organize a big production. It will be more profitable and will have least fixed, variable and total costs.

Choosing a more profitable production option, the firm must constantly monitor all its expenses in order to be able to change resources on time.