Costs. Production cost formulas

Every organization strives to achieve maximum profit. Any production incurs costs for the purchase of factors of production. At the same time, the organization strives to achieve such a level that a given volume of production is provided at the lowest possible cost. The firm cannot influence the prices of resources. But, knowing the dependence of production volumes on the number of variable costs, costs can be calculated. Cost formulas will be presented below.

Types of costs

From an organizational point of view, expenses are divided into the following groups:

• individual (expenses specific enterprise) and public (production costs specific type products incurred by the entire economy);
• alternative;
• production;
• are common.

The second group is further divided into several elements.

Total expenses

Before studying how costs and cost formulas are calculated, let's look at the basic terms.

Total costs (TC) are the total costs of producing a certain volume of products. In the short term, a number of factors (for example, capital) do not change, and some costs do not depend on output volumes. This is called total fixed costs (TFC). The amount of costs that changes with output is called total variable costs (TVC). How to calculate total costs? Formula:

Fixed costs, the calculation formula for which will be presented below, include: interest on loans, depreciation, insurance premiums, rent, salary. Even if the organization does not work, it must pay rent and loan debt. Variable expenses include salaries, costs of purchasing materials, paying for electricity, etc.

With an increase in output volumes, variable production costs, the calculation formulas for which were presented earlier:

• grow proportionally;
• slow down growth when reaching the maximum profitable production volume;
• resume growth due to disruption optimal sizes enterprises.

Average expenses

Wanting to maximize profits, the organization seeks to reduce costs per unit of product. This ratio shows a parameter such as (ATC) average cost. Formula:

ATC = TC\Q.

ATC = AFC + AVC.

Marginal costs

The change in total costs when production volume increases or decreases by one unit shows marginal costs. Formula:

From an economic point of view, marginal costs are very important in determining the behavior of an organization in market conditions.

Relationship

Marginal cost must be less than total average cost (per unit). Failure to comply with this ratio indicates a violation of the optimal size of the enterprise. Average costs will change in the same way as marginal costs. It is impossible to constantly increase production volume. This is the law of diminishing returns. At a certain level, variable costs, the calculation formula for which was presented earlier, will reach their maximum. After this critical level, an increase in production volumes even by one will lead to an increase in all types of costs.

Example

Having information about the volume of production and the level of fixed costs, you can calculate everything existing species costs.

Without engaging in production, the organization bears fixed costs at the level of 60 thousand rubles.

Variable costs are calculated using the formula: VC = TC - FC.

If the organization is not engaged in production, the amount of variable costs will be zero. With an increase in production by 1 piece, VC will be: 130 - 60 = 70 rubles, etc.

Marginal costs are calculated using the formula:

MC = ΔTC / 1 = ΔTC = TC(n) - TC(n-1).

The denominator of the fraction is 1, since each time the volume of production increases by 1 piece. All other costs are calculated using standard formulas.

Opportunity Cost

Accounting expenses are the cost of the resources used in their purchase prices. They are also called explicit. The amount of these costs can always be calculated and justified with a specific document. These include:

• salary;
• equipment rental costs;
• fare;
• payment for materials, bank services, etc.

Economic costs are the cost of other assets that could be obtained from alternative uses of resources. Economic costs = Explicit + Implicit costs. These two types of expenses most often do not coincide.

Implicit costs include payments that a firm could receive if it used its resources more profitably. If they were bought in a competitive market, their price would be the best among the alternatives. But pricing is influenced by the state and market imperfections. Therefore, the market price may not reflect the true cost of the resource and may be higher or lower than the opportunity cost. Let's take a closer look economic costs, cost formulas.

Examples

An entrepreneur, working for himself, receives a certain profit from his activities. If the sum of all expenses incurred is higher than the income received, then the entrepreneur ultimately suffers a net loss. It, together with net profit, is recorded in documents and refers to explicit costs. If an entrepreneur worked from home and received an income that exceeded his net profit, then the difference between these values ​​would constitute implicit costs. For example, an entrepreneur receives a net profit of 15 thousand rubles, and if he were employed, he would have 20,000. In this case, there are implicit costs. Cost formulas:

NI = Salary - Net profit= 20 - 15 = 5 thousand rubles.

Another example: an organization uses in its activities premises that belong to it by right of ownership. Explicit expenses in this case include the amount of utility costs (for example, 2 thousand rubles). If the organization rented out this premises, it would receive an income of 2.5 thousand rubles. It is clear that in this case the company would also pay utility bills monthly. But she would also receive net income. There are implicit costs here. Cost formulas:

NI = Rent - Utilities = 2.5 - 2 = 0.5 thousand rubles.

Returnable and sunk costs

The cost for an organization to enter and exit a market is called sunk costs. Expenses for registering an enterprise, obtaining a license, payment advertising campaign no one will return it, even if the company goes out of business. In a narrower sense, sunk costs include costs of resources that cannot be used in alternative ways, such as purchasing specialized equipment. This category of expenses does not relate to economic costs and does not affect the current state of the company.

Costs and price

If the organization's average costs are equal to the market price, then the firm makes zero profit. If favorable conditions increase the price, the organization makes a profit. If the price corresponds to the minimum average cost, then the question arises about the feasibility of production. If the price does not even cover the minimum variable costs, then the losses from the liquidation of the company will be less than from its functioning.

International distribution of labor (IDL)

The world economy is based on MRI - the specialization of countries in the production individual species goods. This is the basis of any type of cooperation between all states of the world. The essence of MRI is revealed in its division and unification.

One production process cannot be divided into several separate ones. At the same time, such a division will make it possible to unite separate industries and territorial complexes and establish interconnections between countries. This is the essence of MRI. It is based on the economically advantageous specialization of individual countries in the production of certain types of goods and their exchange in quantitative and qualitative ratios.

Development factors

The following factors encourage countries to participate in MRI:

• Volume of the domestic market. U large countries there is greater opportunity to find the necessary factors of production and less need to engage in international specialization. At the same time, market relations are developing, import purchases are compensated by export specialization.
• The lower the state's potential, the greater the need to participate in MRT.
• High provision of the country with mono-resources (for example, oil) and low level provision of mineral resources encourages active participation in MRI.
• The more specific gravity basic industries in the structure of the economy, the less the need for MRI.

Each participant finds economic benefit in the process itself.

Opportunity Cost- opportunity cost or opportunity cost - an economic term denoting lost profit (in a particular case - profit, income) as a result of choosing one of alternative options use of resources and thereby forego other opportunities. The value of opportunity costs is related to the utility of the most valuable alternative that was not realized. Opportunity costs are characterized by their inseparability from decision-making (actions), subjectivity, and expectedness at the time the action is taken.

Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.

A simple example is given by the famous joke about a tailor who dreamed of becoming the king of England and at the same time “would be a little richer because he would sew a little more.” However, since it is impossible to be a king and a tailor at the same time, the income from the tailoring business will be lost. They should be considered the cost of lost opportunity when ascending to the throne. If you remain a tailor, then the income from the royal position will be lost, which will be the cost of lost opportunity in this case.

Explicit costs- This opportunity cost taking the form of direct (monetary) payments for factors of production. These are such as: payment wages, interest to the bank, fees to managers, payment to providers of financial and other services, payment of transportation costs and much more. But costs are not limited only to the obvious costs incurred by the enterprise. There are also implicit costs. These include the opportunity costs of resources directly from the owners of the enterprise themselves. They are not fixed in contracts and therefore remain unreceived in material form. For example, steel used to make weapons cannot be used to make cars. Typically, businesses do not reflect implicit costs in financial statements, but that doesn’t make them any smaller.

F. Wieser's idea of ​​opportunity costs

The idea of ​​opportunity costs belongs to Friedrich Wieser, who identified it in 1879 as the idea of ​​​​using limited resources and laid the foundation for criticism of the cost concept contained in the labor theory of value.

The essence of F. Wieser's idea of ​​opportunity costs is that the real cost of any produced good is the lost utility of other goods that could have been produced with the help of resources used for already produced goods. In this sense, the costs of production of any goods represent potentially lost other, unreleased useful goods. F. Wieser. Determined the value of resource costs in terms of the maximum possible return on production. If too much is produced in one direction, less may be produced in another, and this will be felt more strongly than the gain from overproduction. Satisfying needs with an increasing production of some goods and refusing additional quantities of other goods, one has to pay for the choice made a correspondingly increasing price, expressed in these unreleased goods. This is the meaning of opportunity costs, called Wieser's law.

Nobel laureate in the field of modern economics V.V. Leontiev proposed an interpretation of Wieser's law in terms of relative economic efficiency distribution of limited resources. It is embodied in his scientific and practical ideas, which form the basis of the “input-output” economic model. Leontiev notes that the size and distribution of any mass of products that seems most effective for achieving a given economic goal may turn out to be completely insufficient from the point of view of another goal.

The question of the economic goal, of what, how and for whom to produce, acquires a practical meaning to the extent of the rights and responsibility for the choice of one or another alternative, which determines the proportions and directions of distribution of limited resources. The right to choose a priority among alternatives is at the same time the obligation to compensate for opportunity costs, to pay that increasing price for diverting resources to some priorities and abandoning others.

A term denoting lost profits (in a particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other opportunities. The value of lost profits is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an integral part of any decision making. The term was introduced by the Austrian economist Friedrich von Wieser in his monograph “The Theory of Social Economy” in 1914.

The theory of opportunity costs is described in the monograph “The Theory of Social Economy” of 1914. According to it:

The contribution of von Wieser's opportunity cost theory to economics is that it is the first description of the principles efficient production.

Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.

Example

If there are two investment options, A and B, and the options are mutually exclusive, then when assessing the profitability of option A, it is necessary to take into account the lost income from not accepting option B as the cost of a lost opportunity, and vice versa.

A simple example is given by the famous joke about a tailor who dreamed of becoming a king and at the same time “would be a little richer because he would sew a little more.” However, since being a king and a tailor simultaneously impossible, then the income from the tailoring business will be lost. This should be considered lost profits upon accession to the throne. If you remain a tailor, then the income from the royal position will be lost, which will happen opportunity costs given choice.

Notes

Wikimedia Foundation. 2010.

See what “Opportunity costs” are in other dictionaries:

- (opportunity costs) Benefits lost due to non-use economic resource in the most profitable of all possible types activities. For example, for a self-employed small owner, the opportunity cost is... ... Financial Dictionary

opportunity cost- Income lost by an economic agent as a result of making any decision (although something else could be taken). The opportunity cost of a good or service is the cost of goods and services that had to be given up in order to... ... Technical Translator's Guide

- (opportunity costs) Benefit lost due to non-use of an economic resource in the most profitable of all possible spheres and sectors of the economy. For example, for an independent owner, the opportunity cost is the highest... ... Dictionary of business terms

- (opportunity cost) The amount of goods and services that could be received instead of any other product. If it was not produced, the resources used to make it could have been used to produce other goods and services. If… … Economic dictionary

Opportunity Cost- see Opportunity costs... Librarian's terminological dictionary on socio-economic topics

Opportunity Cost- (OPPORTUNITY COST) economic costs of any type of activity, the value of which is determined by the size of the maximum income from the most effective alternative activity... Modern money and banking: glossary

Opportunity Cost- The difference between the effectiveness of real and desired investments, taking into account fixed costs and transaction execution costs. The efficiency differential represents the consequences of failing to execute all desired trades. The most valuable of... ... Investment Dictionary

Opportunity Cost- income possible in an alternative option, but lost due to the fact that these resources are used in accordance with another option... Glossary of terms on expertise and real estate management

Opportunity cost, opportunity cost- [(opportunity cost] Costs (often called opportunity costs) that the owner of a resource may incur by choosing a specific option for its use and - thereby - rejecting all available alternatives. Numerically defined as ... ... Economic and mathematical dictionary

The expected return on the best of the alternative investments that are abandoned for the implementation of a given project (See RATE OF RETURN) Dictionary of business terms. Akademik.ru. 2001... Dictionary of business terms

Books

• Economic way of thinking, Heine, Paul, Bouttke, Peter, Prichitko, David. Economic Thinking is one of the world's most popular courses in economic theory. The book describes not only the basic principles of micro- and macroeconomic analysis, but also...

Opportunity Cost is the cost of producing one good expressed in terms of the cost of producing another good. Opportunity costs are also called opportunity costs.

Opportunity costs and economic efficiency. The concept of opportunity cost is a powerful tool in making effective economic decisions. The assessment of resource costs is carried out here on the basis of comparison with the best of the competitors, the most effective method use of rare resources. The centrally managed system deprived economic entities of independence in making strategic decisions. This means the possibility of choosing better alternatives. The central government authorities themselves, even with the help of computers, were unable to calculate the optimal production structure for the country. They could not find answers to the two main questions of economics: “what to produce?” and “how to produce?”. Therefore, under these conditions, the result of opportunity costs was often commodity shortages and low-quality products.

For a market economy, choice and alternativeness are integral features. Resources must be used optimally, then they will bring maximum profit. The saturation of goods and services that consumers need is a sustainable result of the opportunity costs of the market system.

Uncertainty in the size of opportunity costs. Opportunity costs are sometimes difficult to imagine as a certain number of rubles or dollars. In a widely and dynamically changing economic environment, it is difficult to choose The best way use of the available resource. In a market economy, this is done by the entrepreneur himself as the organizer of production. Based on his experience and intuition, he determines the effect of a particular direction of application of the resource. At the same time, income from lost opportunities (and therefore the size of opportunity costs) is always hypothetical.

For example, assuming that the opportunity cost of producing miniskirts would be 1 million rubles, the company proceeded from the hypothesis that maxi-skirts could be sold for this amount. But who can guarantee that fashion wouldn't make long skirts more popular? And that they couldn’t be sold for 2 million rubles? However, one cannot be sure that all alternatives have actually been considered. Perhaps, by using these funds to sew men's trousers, the company will receive much greater profits.

Opportunity costs and the time factor. The accounting concept completely ignores the time factor. It estimates costs based on the results of already completed transactions. And when determining opportunity costs, it is important to understand that the effect of any option for using a resource can manifest itself in different periods. The choice of an alternative is often associated with the answer to the question of what to prefer: quick profit at the cost of future losses or current losses for the sake of profit in the future? On the one hand, this complicates cost estimation. On the other hand, the complexity of the analysis results in the advantage of a more thorough consideration of all aspects of the future project.

Production costs are usually understood as a group of expenses, monetary expenditures necessary to create a product. That is, for enterprises (firms, companies), they act as payment for acquired production factors. Such expenses cover the payment for materials necessary to provide production process(raw materials, electricity, fuel), employees, depreciation, and expenses to ensure production management. When goods are sold, entrepreneurs receive revenue. Some of the funds received are used to compensate for production costs (for production required quantity goods), the second part is ensuring profit, main goal, for the sake of which any production begins. This means that production will be less than the cost of goods per volume of profit.

What is opportunity cost?

Most of the costs of production come from the use of resources that support this very production. When resources are used in one place, they cannot be used elsewhere because they are rare and limited. For example, the money that was spent to buy a blast furnace to produce pig iron cannot be used to produce soda. Result: if any resource is decided to be used in a certain way, then it cannot be spent in another way.

Taking into account precisely this circumstance, whenever a decision is made to start production, there is a need to refuse to use a certain amount of resources in order to use this same resource in the manufacture of other products. Thus, opportunity costs are created.