What is the general cost? What are production costs
2.3.1. Production costs in a market economy.
Production costs – This is the monetary cost of purchasing the factors of production used. Most cost effective method production is considered to be one in which production costs are minimized. Production costs are measured in value terms based on the costs incurred.
Production costs – costs that are directly associated with the production of goods.
Distribution costs – costs associated with the sale of manufactured products.
The economic essence of costs is based on the problem of limited resources and alternative use, i.e. the use of resources in this production excludes the possibility of using it for another purpose.
The task of economists is to choose the most optimal option for using factors of production and minimizing costs.
Internal (implicit) costs – These are monetary incomes that the company donates, independently using its resources, i.e. These are the income that could be received by the company for independently used resources under the best of conditions. possible ways their applications. Opportunity Cost lost opportunity - the amount of money that is needed to divert a specific resource from the production of good B and use it to produce good A.
Thus, the costs in cash that the company incurred in favor of suppliers (labor, services, fuel, raw materials) are called external (explicit) costs.
Dividing costs into explicit and implicit are two approaches to understanding the nature of costs.
1. Accounting approach: Production costs should include all real, actual expenses in cash (salaries, rent, alternative costs, raw materials, fuel, depreciation, social contributions).
2. Economic approach: production costs should include not only actual costs in cash, but also unpaid costs; associated with missed opportunities for the most optimal use of these resources.
Short term(SR) is the period of time during which some factors of production are constant and others are variable.
Constant factors are the overall size of buildings, structures, the number of machines and equipment, the number of firms that operate in the industry. Therefore, the possibility of free access of firms to the industry in the short term is limited. Variables – raw materials, number of workers.
Long term(LR) – the period of time during which all factors of production are variable. Those. During this period, you can change the size of buildings, equipment, and the number of companies. During this period, the company can change all production parameters.
Classification of costs
Fixed costs (F.C.) – costs, the value of which in the short term does not change with an increase or decrease in production volume, i.e. they do not depend on the volume of products produced.
Example: building rent, equipment maintenance, administration salary.
C is the amount of costs.
The fixed cost graph is a straight line parallel to the OX axis.
Average fixed costs (A F C) – fixed costs that fall on a unit of output and are determined by the formula: A.F.C. = F.C./ Q
As Q increases, they decrease. This is called overhead allocation. They serve as an incentive for the company to increase production.
The graph of average fixed costs is a curve that has a decreasing character, because As production volume increases, total revenue increases, then average fixed costs represent an increasingly smaller value per unit of product.
Variable costs (V.C.) – costs, the value of which changes depending on the increase or decrease in production volume, i.e. they depend on the volume of products produced.
Example: costs of raw materials, electricity, auxiliary materials, wages (workers). The main share of costs is associated with the use of capital.
The graph is a curve proportional to the volume of output and increasing in nature. But her character can change. In the initial period, variable costs grow at a higher rate than manufactured products. As the optimal production size (Q 1) is achieved, relative savings in VC occur.
Average variable costs (AVC) – the volume of variable costs that falls on a unit of output. They are determined by the following formula: by dividing VC by the volume of output: AVC = VC/Q. First the curve falls, then it is horizontal and increases sharply.
A graph is a curve that does not start at the origin. The general nature of the curve is increasing. The technologically optimal output size is achieved when AVCs become minimal (i.e. Q – 1).
Total costs (TC or C) – the totality of a firm's fixed and variable costs associated with producing products in the short term. They are determined by the formula: TC = FC + VC
Another formula (function of volume industrial products): TC = f (Q).
Depreciation and amortization
Wear- This is the gradual loss of capital resources of their value.
Physical deterioration – loss of the consumer qualities of the means of labor, i.e. technical and production properties.
A decrease in the value of capital goods may not be associated with their loss of consumer qualities; then they speak of obsolescence. It is due to an increase in the efficiency of production of capital goods, i.e. the emergence of similar, but cheaper new means of labor that perform similar functions, but are more advanced.
Obsolescence is a consequence of scientific and technological progress, but for the company this results in increased costs. Obsolescence refers to changes in fixed costs. Physical wear and tear is a variable cost. Capital goods last more than one year. Their cost is transferred to finished products gradually as it wears out - this is called depreciation. Part of the revenue for depreciation is formed in the depreciation fund.
Depreciation deductions:
Reflect an assessment of the amount of depreciation of capital resources, i.e. are one of the cost items;
Serves as a source of reproduction of capital goods.
The state legislates depreciation rates, i.e. the percentage of the value of capital goods by which they are considered to be worn out during the year. It shows how many years the cost of fixed assets must be reimbursed.
Average Total Cost (ATC) – the sum of the total costs per unit of production output:
ATS = TC/Q = (FC + VC)/Q = (FC/Q) + (VC/Q)
The curve is V-shaped. Production volume corresponding to the minimum average total costs, called the technological optimism point.
Marginal Cost (MC) – an increase in total costs caused by an increase in production by the next unit of output.
Determined by the following formula: MS = ∆TC/ ∆Q.
It can be seen that fixed costs do not affect the value of MS. And MC depends on the increment of VC associated with an increase or decrease in production volume (Q).
Marginal cost shows how much it would cost the firm to increase output per unit. They decisively influence the firm’s choice of production volume, because This is exactly the indicator that the company can influence.
The graph is similar to AVC. The MC curve intersects the ATC curve at the point corresponding to minimum value total costs.
In the short run, the company's costs are fixed and variable. This follows from the fact that the company’s production capacity remains unchanged and the dynamics of indicators is determined by the increase in equipment utilization.
Based on this graph, you can build a new graph. Which allows you to visualize the company’s capabilities, maximize profits and view the boundaries of the company’s existence in general.
For making a firm's decision, the most important characteristic is the average value; average fixed costs fall as production volume increases.
Therefore, the dependence of variable costs on the production growth function is considered.
At stage I, average variable costs decrease and then begin to grow under the influence of economies of scale. During this period, it is necessary to determine the break-even point of production (TB).
TB is the level of physical sales volume over an estimated period of time at which revenue from product sales coincides with production costs.
Point A – TB, at which revenue (TR) = TC
Restrictions that must be observed when calculating TB
1. The volume of production is equal to the volume of sales.
2. Fixed costs are the same for any volume of production.
3. Variable costs change in proportion to the volume of production.
4. The price does not change during the period for which the TB is determined.
5. The price of a unit of production and the cost of a unit of resources remain constant.
Law of Diminishing Marginal Returns is not absolute, but relative in nature and it operates only in the short term, when at least one of the factors of production remains unchanged.
Law: with the growth of someone’s use of a factor of production, with the rest remaining unchanged, sooner or later a point is reached, starting from which additional use variable factors leads to a decrease in production growth.
The operation of this law presupposes the unchanged state of technical and technological production. And therefore, technological progress can change the scope of this law.
The long-run period is characterized by the fact that the firm is able to change all the factors of production used. During this period variable nature of all used production factors allows the company to use the most optimal combinations of them. This will affect the magnitude and dynamics of average costs (costs per unit of production). If a firm decides to increase production volume, but by initial stage(ATS) will first decrease, and then, when more and more new capacities are involved in production, they will begin to increase.
The graph of long-term total costs shows seven different options (1 – 7) for the behavior of ATS in short-term periods, because The long-term period is the sum of the short-term periods.
The long-run cost curve consists of options called stages of growth. In each stage (I – III) the company operates in the short term. The dynamics of the long-run cost curve can be explained using economies of scale. The company changes the parameters of its activities, i.e. the transition from one type of enterprise size to another is called change in scale of production.
I – in this time interval, long-term costs decrease with an increase in the volume of output, i.e. there are economies of scale - a positive effect of scale (from 0 to Q 1).
II – (this is from Q 1 to Q 2), at this time interval of production, the long-term ATS does not react to an increase in production volume, i.e. remains unchanged. And the firm will have a constant effect from changes in the scale of production (constant returns to scale).
III – long-term ATC increases with an increase in output and there is damage from an increase in the scale of production or diseconomies of scale(from Q 2 to Q 3).
3. IN general view profit is defined as the difference between total revenue and total costs for a certain period of time:
SP = TR –TS
TR ( total revenue) - the amount of cash received by a company from the sale of a certain amount of goods:
TR = P* Q
AR(average revenue) is the amount of cash receipts per unit of product sold.
Average revenue is equal to the market price:
AR = TR/ Q = PQ/ Q = P
M.R.(marginal revenue) is the increase in revenue that arises from the sale of the next unit of production. Under perfect competition, it is equal to the market price:
M.R. = ∆ TR/∆ Q = ∆(PQ) /∆ Q =∆ P
In connection with the classification of costs into external (explicit) and internal (implicit), different concepts of profit are assumed.
Explicit costs (external) are determined by the amount of expenses of the enterprise to pay for purchased factors of production from outside.
Implicit costs (internal) determined by the cost of resources owned by a given enterprise.
If we subtract external costs from total revenue, we get accounting profit - takes into account external costs, but does not take into account internal ones.
If internal costs are subtracted from accounting profit, we get economic profit.
Unlike accounting profit, economic profit takes into account both external and internal costs.
Normal profit appears when total revenues enterprise or firm is equal to the total costs, calculated as alternative. The minimum level of profitability is when it is profitable for an entrepreneur to run a business. “0” - zero economic profit.
Economic profit(clean) – its presence means that there is this enterprise resources are used more efficiently.
Accounting profit exceeds the economic value by the amount of implicit costs. Economic profit serves as a criterion for the success of an enterprise.
Its presence or absence is an incentive to attract additional resources or transfer them to other areas of use.
The company's goals are to maximize profit, which is the difference between total revenue and total costs. Since both costs and income are a function of production volume, the main problem for the company becomes determining the optimal (best) production volume. A firm will maximize profit at the level of output at which the difference between total revenue and total cost is greatest, or at the level at which marginal revenue equals marginal cost. If the firm's losses are less than its fixed costs, then the firm should continue to operate (in the short term); if the losses are greater than its fixed costs, then the firm should stop production.
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VARIABLE COSTS
VARIABLE COSTS
(variable cost) Variable costs are that part of costs that changes depending on the level of output. They are the opposite of fixed costs, which are necessary to make output possible at all; they do not depend on the level of output. It should be kept in mind that this is a fundamental difference. The price of a resource used may be stable over the years, but it is still a variable cost if the quantity of that resource used depends on output. The price of other inputs may change, but they will still be considered fixed costs if the amount of inputs used does not depend on the level of output.
Economy. Dictionary. - M.: "INFRA-M", Publishing House "Ves Mir". J. Black. General edition: Doctor of Economics Osadchaya I.M.. 2000 .
Economic dictionary. 2000 .
See what “VARIABLE COSTS” is in other dictionaries:
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Any production activity requires financial costs for material and labor resources. Provisioning Cost Ratio economic activity with the profit received determines the profitability of the business entity. In the economics of an enterprise, these factors occupy a central position, since the level of competitiveness of the company in the market for similar activities depends on them, which has a direct impact on the success of the implementation of the entrepreneurial idea.
Enterprise costs help assess its level of profitability
What are costs
Economic activity carried out in any field is always accompanied by certain monetary expenses for the purchase and use of resources.
These costs in monetary terms are called enterprise costs. They not only influence the formation of the balance of income and expenses, but also determine the need to purchase 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 economic sphere regarding the division of costs, allows the head of a business entity to timely determine the need to use production techniques that reduce costs and increase the return on funds invested 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
Profit received as a result of economic activity is important factor relationships of a cost nature in a market economy. It is the main element of the management mechanism of a business entity. It helps analyze the profitability of a business. Variable and constant costs, examples of which are discussed below, determine the costs of the enterprise, depending on the cost form of the income received. They are a standard for assessing performance, based on which comparative analysis can be carried out.
Representatives of the government apparatus are interested in reducing costs, since this contributes to the growth of income received, which is the main source of budget replenishment. Therefore, when planning it, the statistical parameters of business entities in this area are taken into account, making it possible to determine the potential amount of mandatory contributions.
What does the parameter value depend on?
The value of production costs is directly proportional dependence on the cost of acquired resource value factors. The natural desire of the manager of a business entity is to obtain maximum profit while minimum costs. A well-organized economic process allows you to maintain the volume of production activities while minimizing costs, ensured by reducing the resources put into circulation.
A business entity, carrying out activities, in the process of realizing its results, bears additional expenses related to market promotion and sales. This item of commercial expenses, called sales costs, includes financial expenses to support activities. Variable costs also include marketing research, advertising, and transportation of products to consumers.
What are the general costs?
Individual expense items include mandatory payments to current accounts government agencies, such as taxes, fees and contributions to trust funds. These types of cash expenses are also components of business costs.
Read also: Personnel turnover: what it shows, reasons, how to calculate
Components of a parameter
The value of production costs is formed from three elements:
- cost price;
- price;
- price.
Cost is the initial cost of a business entity to produce a unit of product. 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 according to market value, taking into account the allowances that form the profit item.
Types of costs
Classification of enterprise costs
There are several types of costs, which are easier to understand if you imagine the structure of the enterprise. The result of any production is a transaction that stipulates the sale of the results of labor. The seller's main position is to cover the costs spent on production activities. Therefore, the price primarily includes the cost parameter. They may be of an economic, accounting or alternative nature.
Economic costs
What are economic costs
Economic costs imply the economic costs of ensuring the production of a product or the provision of a service. The constituent elements of the parameter are:
- material and labor resources acquired to enable the implementation of production activities;
- previously purchased internal resources that are not included in market turnover, without which the company’s functioning is impossible;
- part of the profit considered as compensation for the risk of possible losses or loss of income.
The entrepreneur seeks to compensate the economic criteria of the parameter in terms of value for the results of labor. 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 expense items that 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 hired workers;
- acquisition or lease of land or water resources;
- investment in means of production, which may be physical or financial in nature.
Accounting costs include only real and legally documented costs aimed at purchasing resources. The parameter takes into account the purchase of equipment, tools, as well as movable and immovable property. This category can also include the issue of securities or shares used as part of the production process.
Accounting expenses are always less than economic expenses because Accounting does not allow abstraction.
The parameter can be direct or indirect. Direct expenses take into account the money spent on production. Indirect costs involve monetary expenditures to ensure the normal functioning of production. These include deductions for depreciation of equipment, payment of interest to banking institutions for the use in cash, as well as overhead costs.
Alternative
Opportunity Cost
Opportunity costs determine the costs of producing products that the subject entrepreneurial activity certainly will not produce due to the use of only individual process elements to ensure the functioning of the enterprise. These 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 manager of a business entity, depending on his personal idea of the desired profitability of the business.
Classification of a parameter to determine the rational functioning of an enterprise
An increase in production volumes causes an increase in costs to ensure 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, variable and fixed costs.This division is acceptable for short time periods determined by production cycles, during which factors are practically unchanged. For long-term periods, all parameters are categorized as variables.
There are several cost classifications enterprises: accounting and economic, explicit and implicit, constant, variable and gross, repayable and non-refundable, etc.
Let us dwell on one of them, according to which all expenses can be divided into fixed and variable. It should be understood that such a division is possible only in the short term, since over long periods of time all costs can be attributed to variables.
What are fixed production costs
Fixed costs are expenses that a company incurs regardless of whether it produces products or not. This type of cost does not depend on the volume of products produced or services provided. Alternative names for these costs serve as overhead or sunk costs. The company ceases to bear this type of cost only in the event of liquidation.
Fixed costs: examples
Fixed costs in the short term may include the following types enterprise expenses:
At the same time when calculating average size fixed costs (this is the ratio of fixed costs to the volume of production), the amount of such costs per unit of output will be lower, the larger the production volume.
Variable and total costs
In addition, the enterprise also has variable costs - this is the cost of raw materials, supplies, and inventory, which are fully used within each production cycle. They are called variables because the amount of such costs is directly dependent on the volume of products produced.
Magnitude fixed and variable costs during one production cycle is called gross or total costs. The entire set of expenses incurred by an enterprise that affect the cost of a unit of output is called the cost of production.
These indicators are necessary to carry out financial analysis activities of the company, calculating its efficiency, searching for opportunities to reduce the cost of products produced by the enterprise, and increasing the competitiveness of the organization.
A reduction in average fixed costs can be achieved by increasing the volume of products produced or services provided. The lower this indicator, the lower the cost of products (services) and the higher the profitability of the company.
In addition, division into constants and variable costs very conditional. At different periods of time, when using different approaches to their classification, costs can be classified as both fixed and variable. Most often, the management of the enterprise itself decides which expenses are classified as variable or overhead costs.
Examples of expenses that can be classified as one or the other type of cost are:
A company's costs are the totality of all costs of producing a product or service, expressed in monetary terms. IN Russian practice they are often called cost. Each organization, regardless of what type of activity it is engaged in, has certain costs. The firm's costs are the amounts it pays for advertising, raw materials, rent, labor, etc. Many managers try to provide at the lowest possible costs effective work enterprises.
Let's consider the basic classification of a company's costs. They are divided into constants and variables. Costs can be considered in the short term and the long term ultimately makes all costs variable, since during this time some large projects may end and others begin.
The company's costs in the short term can be clearly divided into fixed and variable. The first type includes costs that do not depend on production volume. For example, deductions for depreciation of structures, buildings, insurance premiums, rent, salaries of managers and other employees related to senior management, etc. Fixed costs of a company are mandatory costs that an organization pays even in the absence of production. on the contrary, they directly depend on the activities of the enterprise. If production volumes increase, then costs increase. These include costs of fuel, raw materials, energy, transport services, wages most of the enterprise’s employees, etc.
Why does a businessman need to divide costs into fixed and variable? This moment has an impact on the functioning of the enterprise in general. Since variable costs can be controlled, a manager can reduce costs by changing production volumes. And since the overall costs of the enterprise are ultimately reduced, the profitability of the organization as a whole increases.
In economics there is such a thing as opportunity costs. They are due to the fact that all resources are limited, and the enterprise has to choose one way or another to use them. Opportunity costs are lost profits. The management of the enterprise, in order to receive one income, deliberately refuses to receive other profits.
A firm's opportunity costs are divided into explicit and implicit. The first are those payments that the company would pay to suppliers for raw materials, for additional rent, etc. That is, their organization can guess in advance. These include cash costs for renting or purchasing machines, buildings, machinery, hourly wages of workers, payment for raw materials, components, semi-finished products, etc.
The implicit costs of a firm belong to the organization itself. These cost items are not covered. to strangers. This also includes profit that could have been received for more favorable conditions. For example, the income that an entrepreneur can receive if he works in another place. Implicit costs include rental payments for land, interest on capital invested in securities, and so on. Every person has this type of expense. Consider an ordinary factory worker. This person sells his time for a fee, but he could earn a higher salary in another organization.
So, in conditions market economy it is necessary to strictly monitor the organization’s expenses, it is necessary to create new technologies and train employees. This will help improve production and plan costs more effectively. This means it will lead to an increase in the company’s income.