What is included in variable costs. Dependence of fixed costs on the volume of production

There are a large number of ways in which a company makes a profit, and the fact of cost is important. Costs are the real costs incurred by the company in its operation. If a company is unable to pay attention to the category of costs, then the situation may become unpredictable and profit margins may decrease.

Fixed costs of production must be analyzed when constructing their classification, with which you can determine the idea of ​​their properties and main characteristics. The main classification of production costs includes fixed, variable, general costs.

Fixed costs of production

Fixed costs of production are an element of the break-even point model. They are costs regardless of the volume of output and are opposed to variable costs. The sum of fixed and variable costs represent the total costs of the enterprise. Fixed costs can be made up of several elements:

1. room rental,
2. deductions for depreciation,
3. management and administrative staff costs,
4. the cost of machines, machinery and equipment,
5. security of premises for production,
6. payment of interest on loans to banks.

Fixed costs are represented by the costs of enterprises, which are unchanged in short periods and do not depend on changes in production volumes. This type of cost must be paid even if the enterprise does not produce anything.

Average fixed costs

Average fixed costs can be obtained by calculating the ratio of fixed costs and output. So the average fixed cost is constant flow for the release of products. In sum, fixed costs do not depend on production volumes. For this reason, average fixed costs will tend to decrease as the number of products produced increases. This is due to the fact that with an increase in production volumes, the amount of fixed costs is distributed over a larger number of products.

Features of fixed costs

Fixed costs in the short run do not change with changes in output. Fixed costs are sometimes referred to as sunk costs or overheads. Fixed costs include the costs of maintaining buildings, space, and purchasing equipment. The fixed cost category is used in several formulas.

Thus, when determining total costs (TC), a combination of fixed and variable costs is needed. The total costs are calculated by the formula:

This type of cost increases with the increase in production volumes. There is also a formula for determining the total fixed costs, which are calculated by dividing the fixed costs by a certain volume of manufactured products. The formula looks like this:

Average fixed costs are used to calculate average total costs. Average total costs are found through the sum of average fixed and variable costs according to the formula:

Fixed costs in the short run

In the production of products, living and past labor has been expended. In this case, each enterprise seeks to obtain the greatest profit from its operation. In this case, each enterprise can go in two ways - to sell products more expensively or to reduce their production costs.

In accordance with the time it takes to change the amount of resources used in production processes, it is customary to distinguish between long-term and short-term periods of the enterprise. The short-term interval is the time interval during which the size of the enterprise, its output and costs change. At this time, the change in the volume of products occurs through a change in the volume of variable costs. In short-term periods, an enterprise can quickly change only variable factors, including raw materials, labor, fuel, and auxiliary materials. The short run divides costs into fixed and variable. During such periods, fixed costs are mainly provided, determined by fixed costs.

The fixed costs of production get their name in accordance with their invariable nature and independence in relation to the volume of production.

short term - this is the period of time during which some factors of production are constant, while others are variable.

Fixed factors include fixed assets, the number of firms operating in the industry. In this period, the company has the opportunity to vary only the degree of utilization of production capacities.

Long term is the length of time during which all factors are variable. In the long run, the firm has the ability to change the overall dimensions of buildings, structures, the amount of equipment, and the industry - the number of firms operating in it.

fixed costs ( FC ) - these are costs, the value of which in the short run does not change with an increase or decrease in the volume of production.

Fixed costs include costs associated with the use of buildings and structures, machinery and production equipment, rent, overhaul as well as administrative costs.

Because As production increases, total revenue increases, then average fixed costs (AFC) are a decreasing value.

variable costs ( VC ) - These are costs, the value of which varies depending on the increase or decrease in the volume of production.

Variable costs include the cost of raw materials, electricity, auxiliary materials, labor costs.

Average Variable Costs (AVC) are:

Total costs ( TC ) - a set of fixed and variable costs of the company.

Total costs are a function of the output produced:

TC = f(Q), TC = FC + VC.

Graphically, the total costs are obtained by summing the curves of fixed and variable costs (Figure 6.1).

The average total cost is: ATC = TC/Q or AFC +AVC = (FC + VC)/Q.

Graphically, ATC can be obtained by summing the AFC and AVC curves.

marginal cost ( MC ) is the increase in total cost due to an infinitesimal increase in production. Marginal cost is usually understood as the cost associated with the production of an additional unit of output.

Any production activity requires financial costs for material and labor resources. Support cost ratio economic activity with the received profit determines the profitability of the business entity. In the economics of the enterprise, these factors occupy a central position, since they determine the level of competitiveness of the company in the market of similar activities that have a direct impact on the success of the implementation of an entrepreneurial idea.

The costs of the enterprise help to assess its level of profitability

What are costs

Economic activity carried out in any area is always accompanied by certain monetary expenditures for the purchase and use of resources.

These costs in terms of value are called enterprise costs. They not only influence the formation of the balance of income and expenses, but also determine the need for the acquisition of additional production factors, as well as the possibility of investing in this direction. The parameter allows you to determine the efficiency of production activities, as well as the degree of rationality of its organization.

Competence in the economic sphere, concerning the division of costs, allows the head of a business entity to determine in a timely manner the need to apply production methods that reduce costs and increase the return on investment in resources for the purchase of raw materials, materials, equipment and hired labor. Such achievements allow us to improve profitability indicators at the end of the reporting period.

Application of the concept in economic theory

What are production costs

The profit received as a result of economic activity is an important factor in the relationship of a value nature in a market economy. It is the main element of the management mechanism of a business entity. It is used to analyze the profitability of a business. Variable and fixed costs, examples of which are discussed below, determine the costs of the enterprise, depending on the value form of the income received. They serve as benchmarks for performance evaluation against which comparative analysis can be carried out.

Representatives of the state apparatus are interested in reducing costs, since this contributes to the growth of income received, which is the main source of replenishment of the budget. Therefore, when planning it, the statistical parameters of business entities in this area are taken into account, which make it possible to determine the potential amount of mandatory deductions.

What determines the value of the parameter

The value of production costs is directly proportional to the cost of acquired factors of resource value. The natural desire of the head of a business entity is to obtain maximum profit at minimum cost. A well-organized business process allows you to maintain the volume of production activities while minimizing costs, provided by reducing the resources put into circulation.

A business entity, carrying out activities, in the process of implementing its results, incurs additional costs associated with promotion on the market and sales. This article of commercial expenses, called implementation costs, includes financial expenses for the provision of activities. Variable costs also include marketing research, advertising, as well as transportation of products to its consumers.

What is the total cost

TO individual articles expenses include mandatory payments to settlement accounts government agencies such as taxes, fees and contributions to trust funds. These types of cash expenditures are also components of entrepreneurial costs.

Read also: Non-linear depreciation method

Constituent Elements of a Parameter

The value of production costs is formed from three elements:

• cost price;
• price;
• price.

The cost price is called the initial costs of a business entity for the manufacture of a unit of output. The cost parameter includes all applicable types of costs that affect the amount of profit. The implementation of the result of labor is carried out at market value, taking into account the allowances that form the profit item.

Types of costs

Enterprise cost classification

There are several types of costs that are easier to understand if you imagine the structure of the enterprise. The result of any production is a transaction that determines the sale of the results of labor. The main position of the seller is to cover the costs of production activities. Therefore, the cost parameter is primarily laid down in the price. They may be of an economic, accounting or alternative nature.

economic costs

What is economic cost

Economic costs refer to the economic costs of providing a product or service. The constituent elements of the parameter are:

• material and labor resources acquired for the possibility of implementing production activities;
• previously purchased internal resources that are not included in the market turnover, without which the operation of the company is impossible;
• part of the profit, considered as compensation for the risk of possible losses or shortfall in income.

The entrepreneur seeks to compensate for the economic criteria of the parameter in terms of the cost of labor results. If he fails to do this, then the meaning of the functioning of the business is lost, and the head of the business entity should look for himself in other areas of activity.

Accounting

What are accounting costs

Accounting costs include items of expenditure, which include funds intended for the acquisition of economic resources. These include expenses that are not used to implement the production cycle, but without which its functioning is impossible:

• payment for mental or physical labor of employees;
• acquisition or lease of land or water resources;
• investment in capital goods, which may be of a physical or financial nature.

Accounting costs include only real and legally documented costs for the purchase of resources. The parameter takes into account the acquisition of equipment, tools, as well as movable and immovable property. This category can also include the issue of securities or shares used in the production process.

Accounting costs are always less than economic costs, because Accounting does not allow abstraction.

The parameter can be direct or indirect. Direct costs take into account the money spent on production. Indirect costs imply cash costs that ensure the normal functioning of production. These include deductions for depreciation of equipment, payment of interest to banking institutions for the use of in cash as well as overhead costs.

Alternative

opportunity cost

Opportunity costs determine the costs of producing the product that the subject entrepreneurial activity probably will not produce due to the use of only individual elements of the process to ensure the functioning of the enterprise. They can be categorized as lost profit opportunities. The value of the parameter corresponds to the difference between economic and accounting costs. It is determined independently by each head of a business entity, depending on his personal idea of ​​the desired profitability of the business.

Classification of the parameter to determine the rational functioning of the enterprise

The growth of production volumes causes an increase in the costs of ensuring the normal functioning of a business entity.

No enterprise can develop and expand indefinitely, since each business entity has individual restrictions regarding optimal size enterprises. To determine the limits of this boundary, apply variable and fixed costs.Such a division is acceptable for short time periods determined by production cycles, during which the factors are practically unchanged. For long-term periods, all parameters are categorized as variables.

Any firm functions for the sake of generating income, and its work is impossible without the funds spent. There are various types of such expenses. There are activities for which constant investments of finance are required. But some of the costs are not regular, and their impact on the course of the product and its sale must also be taken into account.

So, the main meaning of the work of any company is to release a product and receive income from it. In order to start this activity, one must first acquire raw materials, tools of production, and hire labor. Certain finances are spent on this, in economics they are called costs.

People invest finance in production activities for a variety of purposes. Accordingly, the classification of expenses was adopted. Categories of costs (depending on properties):

• Explicit. Such costs are made directly, for the payment of wages to employees, commissions to other organizations, payment for the activities of banks and transport.
• Implicit. Costs for the needs of company executives that are not specified in the contracts.
• Permanent. The means by which continuous production processes are provided.
• Variables. Costs that can easily be adjusted while maintaining the same level of output.
• Irrevocable. Expenses of movable assets that are invested in the activities of the company free of charge. They are characteristic of the initial period of production or re-profiling of the organization. These funds can no longer be spent on other organizations.
• Medium. Costs obtained in the course of calculations, characterizing investments in each unit of the product. This indicator contributes to the pricing of goods.
• Limit. This is the largest cost that cannot be increased due to the low efficiency of capital investments in the company.
• Appeals. The cost of delivering goods from the producer to the consumer.

Application of fixed and variable costs

Consider the differences between fixed costs and variables, their economic characteristics.

The first type of costs (fixed) is designed for investments in the manufacture of a product in a single production cycle. In each organization, their size is individual, so the enterprise considers them separately, taking into account the analysis of the release process. Note that such costs will not differ from the initial production stage to the sale of products to the consumer.

The second type of costs (variables) changes in each production cycle, practically without repetition of this indicator.

The two types of costs together make up the total costs, which are calculated at the end of the production process.

Simply put, Fixed costs are those that do not change over time. What can be attributed to them?

1. payment utilities;
2. The cost of operating the premises;
3. payment of rent;
4. The salary of the staff;

It must be taken into account that the constant level of total costs used in a specific time period of production, during one cycle, refers only to the total number of units of goods produced. If we calculate such costs for each unit, their size will decrease in accordance with the growth in output. This fact applies to all types of production.

Variable costs are proportional to the variable quantity or volume of the product produced.. These include:

1. Energy costs;
2. Material costs;
3. Contractual wages.

This type of cost is closely related to the volume of output of the product, as a result of which it changes according to the indicators of the production of this product.

Cost examples:

Each production cycle corresponds to a specific amount of costs that remain unchanged under any conditions. There are other costs that depend on production resources. As previously stated, costs over a short period of time are variable and fixed.

For a long time, such characteristics are not suitable, because. costs will change in this case.

Fixed Cost Examples

Fixed costs remain at the same level for any volume of output of the product, in a small time period. This is the cost of stable factors of the company, not proportional to the number of units of goods. Examples of such expenses are:

• payment of interest on a bank loan;
• depreciation expenses;
• payment of interest on bonds;
• salary for managers at the enterprise;
• insurance costs.

All costs, independent of the production of a product, which are unchanged in a short period of the production cycle, can be called constant.

Variable Cost Examples

Variable costs, on the other hand, are essentially investments in the production of goods, and therefore depend on its volume. The amount of investment is directly proportional to the amount of goods produced. Examples would be spending on:

• on stocks of raw materials;
• payment of bonuses to employees producing products;
• delivery of materials and the product itself;
• energetic resources;
• equipment;
• other expenses for the production of goods or the provision of services.

Consider a graph of variable costs, which is a curve. (Figure 1.)

Fig.1 - variable cost schedule

The path of this line from the origin to point A depicts an increase in costs with an increase in the quantity of goods produced. Section AB: more rapid increase in costs under conditions mass production. Variable costs can be affected by disproportionate costs for transport services or consumables, improper use of a released product with reduced demand for it.

Example of calculating production costs:

Consider the calculation of fixed and variable costs for specific example. Let's say a shoe company produces 2,000 pairs of boots in a year. During this time, the factory spends funds on the following needs:

• rent - 25,000 rubles;
• interest on a bank loan - 11,000 rubles;
• payment for the production of one pair of shoes - 20 rubles;
• raw materials for the production of a pair of boots - 12 p.

Our task: to calculate the variable, fixed costs, as well as the funds spent on each pair of shoes.

In this case, only rent and loan payments can be called fixed costs. Such costs are unchanged, depending on production volumes, so it is easy to calculate them: 25,000 + 11,000 = 36,000 rubles.

The cost of producing one pair of shoes is variable costs: 20+12=32 rubles.

Consequently, the annual variable costs are calculated as follows: 2000*32=64000 rubles.

General costs- this is the sum of variables and constants: 36,000 + 64,000 \u003d 100,000 rubles.

Average total cost per pair of shoes: 100,000/20=50

Production cost planning

It is important for every company to correctly calculate, plan and analyze production costs.

In the process of cost analysis, options are considered for the economical use of finance that is invested in production and should be distributed correctly. This leads to a decrease in the cost, and hence the final price of the manufactured goods, as well as an increase in the competitiveness of the company and an increase in its income.

The task of each company is to save as much as possible on production and optimize this process so that the enterprise develops and becomes more successful. As a result of these measures, the profitability of the organization also increases, which means that there are more opportunities to invest in it.

To plan production costs, you need to take into account their size in previous cycles. In accordance with the volume of goods produced, a decision is made to reduce or increase production costs.

Balance sheet and costs

Among the accounting documentation of each company there is a "Profit and Loss Statement". This is where all your expenses are recorded.

A little more about this document. This report does not characterize the property status of the enterprise in general, but provides information about its activities for the selected time period. In accordance with OKUD, the profit and loss statement has a form 2. Income and expenses are recorded in it incrementally from the beginning to the end of the year. The report includes a table, in line 020 of which the main costs of the organization are displayed, in line 029 - the difference between profit and costs, in line 040 - expenses included in account 26. The latter are travel expenses, payment for the protection of premises and labor, employee remuneration. Line 070 shows the company's interest on credit obligations.

The initial results of the calculations (when compiling the report) are divided into direct and indirect costs. If we consider these indicators separately, then direct costs can be considered fixed costs, and indirect costs - variables.

In the balance sheet, cost data is not recorded directly, it shows only the assets and financial liabilities of the enterprise.

Accounting costs (otherwise called explicit)- is a payment in cash equivalent of any transactions. They are closely related to the economic costs and income of the firm. We subtract the explicit costs from the company's profit, and if we get zero, then the organization has used its resources in the most correct way.

Cost Calculation Example

Consider an example of calculating accounting and economic costs and profits. The owner of the recently opened laundry planned to receive an income of 120,000 rubles a year. To do this, he will have to cover the costs:

• rent of premises - 30,000 rubles;
• salary for administrators - 20,000 rubles;
• purchase of equipment - 60,000 rubles;
• other small expenses - 15,000 rubles;

Credit payments - 30%, deposit - 25%.

The head of the enterprise bought the equipment at his own expense. Washing machines break down after a while. Given this, it is necessary to create a depreciation fund, into which 6,000 rubles will be transferred every year. All of the above are explicit costs. Economic costs - the possible profit of the laundry owner, in case of acquiring a deposit. To pay the initial expenses, he will have to use a bank loan. Loan in the amount of 45,000 rubles. will cost him 13,500 rubles.

Thus, we calculate explicit costs: 30 + 2 * 20 + 6 + 15 + 13.5 = 104.5 thousand rubles. Implicit (deposit interest): 60 * 0.25 = 15 thousand rubles.

Accounting income: 120-104.5 \u003d 15.5 thousand rubles.

Economic income: 15.5-15=0.5 thousand rubles.

Accounting and economic costs differ from each other, but they are usually considered together.

The value of production costs

Production costs form the law of economic demand: with an increase in the price of a product, the level of its market supply increases, and with a decrease, the supply decreases, while maintaining other conditions. The essence of the law is that each manufacturer wants to offer the maximum amount of goods at the highest price, which is the most profitable.

For the buyer, the cost of the goods is a deterrent. The high price of a product forces the consumer to buy less of it; and, accordingly, cheaper products are purchased in large volumes. The manufacturer receives a profit for the product released, so he seeks to produce it in order to acquire revenue from each unit of the product, in the form of its price.

What is the main role of production costs? Consider it on the example of processing industrial enterprise. Over a period of time, production costs increase. To compensate for them, you need to raise the price of the product. The increase in costs is due to the fact that it is impossible to quickly expand the production area. The equipment is overloaded, which reduces the efficiency of the enterprise. Thus, in order to produce a product with the highest cost, the firm must charge a higher price for it. Price and supply level are directly related.

We cited the classification of costs according to various criteria in. Read more about fixed and variable production costs in this material.

Variable production costs

Variable production costs depend on the volume of output: they change as the quantity of output increases or decreases. Variable production costs include the costs of materials used in the manufacture of products and serving as its basis, piecework wage the main production workers, depreciation of fixed assets accrued in proportion to the volume of production, and other similar costs.

The simplest version of variable costs is proportional variable costs. They are characterized by the fact that the rate of their change is similar to the rate of change in the volume of production. In other words, if, for example, the number of products in the reporting month increased by 2 times compared to the previous month, then variable costs also increase by 2 times. And if the volume of output decreased by 30%, then the value of proportional variable costs will decrease by the same 30%.

But, as a rule, the rate of change in variable costs is not identical to the rate of change in output.

For example, with an increase in the volume of output, the main raw materials that serve as its basis will be purchased in a larger volume. And the growth in the volume of purchases of raw materials led to the provision of discounts. As a result, the total cost of raw materials, although increasing, is not proportional to the growth in sales. Indeed, in this case, the average variable costs are reduced.

Let's show this with an example:

Thus, with an increase in production by 50%, the total mass of raw materials, which is the main component of product A, increased by the same 50%. However, due to the increase in the volume of purchases and the provision of discounts, the total cost of raw materials (variable costs) increased only by 42.5% ((427,500 rubles - 300,000 rubles) / 300,000 rubles * 100%).

At the same time, average variable costs fell from 300 rubles per piece. (300,000 rubles / 1,000 pcs.) up to 285 rubles / pcs. (427,500 rubles / 1,500 pieces).

Fixed Costs of Production: Examples

Variable production costs do not include costs that are fixed and do not depend on output. It's about fixed costs. However, often fixed costs are conditionally fixed in nature, since their value, as a rule, is unchanged only up to a certain level of output. Once a production milestone has been reached, costs previously identified as fixed may also begin to rise.

Fixed production costs include the cost of maintaining administrative and managerial personnel, the cost of renting office space, depreciation of fixed assets on a straight-line basis and other similar costs.