The purpose 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 a firm directly depends on the size of its costs. This article describes the permanent, variable and total costs of production and how they affect the current and future operations of the enterprise.
What is the cost of production
Under the cost of production means the monetary costs of acquiring all the factors used to manufacture products. The most effective way of production is the one that has the minimum value of the cost of producing a unit of goods.
The relevance of calculating this indicator is related to the problem of limited resources and alternative use, when the raw materials and materials used can only be used for their intended purpose, and all other ways of their use are excluded. Therefore, at every enterprise, the economist must carefully calculate all types of production costs and be able to choose the optimal combination of factors used to ensure that the costs are minimal.
Explicit and Implicit Costs
The apparent or external costs include the costs incurred by the enterprise against the suppliers of raw materials, fuel and servicing counterparties.
Implicit, or internal, costs of the enterprise are incomes lost by the firm due to the independent use of its own resources. In other words, this is the amount of money that an enterprise could receive with the best way to apply the available resource base. For example, to divert a particular kind of material from the production of A and use it for the production of B.
This division of costs is associated with different approaches to their calculation.
Methods of calculating costs
In the economy, there are two approaches that are used to calculate the amount of production costs:
- Accounting – costs of production will include only actual expenses: salaries, depreciation, social contributions, payment for raw materials and fuel.
- 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 such types of production costs:
- 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.
- Average fixed costs (AVC) is constant costs, which fall per unit of manufactured products. They are calculated according to the formula:
- SPI = PI. ABOUT,
where D is the volume of production output.
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 costs of production (RI) - costs that depend on production volumes and tend to change with a decrease or increase in the total amount of manufactured goods (wages of workers, costs of resources, raw materials, electricity). This means that as the scale of activity increases, variable expenses will increase. First they will increase in proportion to the volume of output. At the next stage, the enterprise will achieve cost savings in larger production. And in the third period, due to the need to purchase more raw materials, variable production costs can grow. Examples of this trend are rapid transport of finished products to the warehouse, payment to suppliers for additional consignments of raw materials.
When carrying out calculations, it is very important to distinguish the types of costs in order to calculate the correct production cost. It should be remembered that variable production costs do not include rental fees for real estate, depreciation of fixed assets, maintenance of equipment.
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:
Average variable production costs for a certain range of production volumes do not change, but with a significant increase in the amount of manufactured goods, they begin to increase. This is associated with large overall costs and with their heterogeneous composition.
5. Common costs (OI) - include fixed and variable production costs. They are calculated by the formula:
That is, to search for the reasons for a high indicator of total costs is necessary in its components.
6. Average total costs (SDI) - show the total production costs that fall on a unit of goods:
The last two indicators increase with the growth of output.
Types of variable expenses
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 costs 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 only grow 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%.
A short-term period is a period of time during which one group of factors of production is constant, and another - a variable. In this case, the stable factors include the area of the building, the size of the structures, the number of machinery and equipment used. Variable factors consist of raw materials, the number of employees.
A long-term period is a period of time in which all the production factors used are variable. The fact is that any firm for a long period can change the room for more or less, completely update the equipment, reduce or expand the number of enterprises controlled by it, adjust the composition of management personnel. That is, in the long run, all costs are considered as variable production costs.
When planning a long-term business, the enterprise should conduct an in-depth and thorough analysis of all possible costs and make up the dynamics of future expenses in order to achieve the most efficient production.
Average costs in the long run
The enterprise can organize small, medium and large production. When choosing the scale of activity, the firm must take into account the main market indicators, the forecasted 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 option of production, the firm must constantly monitor all its expenses in order to be able to change resources in time.