Certain costs, which do not depend at all on changes in production volume. They can only depend on time. At the same time, variables and permanent costs in sum determine the size of the total costs.
You can also have fixed costs if you derive this indicator from the formula that determines: Revenue = Fixed costs - Variable (total) costs. That is, based on this formula, we get: Fixed costs = Revenue + Variable (total) costs.
Sources:
- Average variable costs
Costs play a big role in business development, because they directly affect profits. In modern economics, there are two types: fixed and variable costs. Their optimization allows you to increase the efficiency of the enterprise.
To begin with, it is necessary to define short-term and long term. This will allow you to better understand the essence of the issue. In the short run, factors of production can be constant or variable. In the long run, they will only be variables. Let's say the building is . In the short term, it will not change in any way: the company will use it to, for example, place machines. However, in the long term, the company can buy a more suitable building.
Fixed costs
Fixed costs are those that do not change in the short run even if production increases or decreases. Let's say the same building. No matter how many goods are produced, the rent will always be the same. You can work even the whole day, the monthly payment will still remain unchanged.
To optimize fixed costs it is necessary comprehensive analysis. Depending on the specific unit, solutions may vary significantly. If we are talking about rent for a building, then you can try to reduce the price for accommodation, occupy only part of the building so as not to pay for everything, etc.
Variable costs
It is not difficult to guess that variables are costs that can change depending on the decrease or increase in production volumes in any period. For example, to make one chair you need to spend half a tree. Accordingly, to make 100 chairs, you need to spend 50 trees.
It is much easier to optimize variable costs than fixed ones. Most often, it is simply necessary to reduce the cost of production. This can be done, for example, by using cheaper materials, upgrading technology or optimizing the location of workplaces. Let’s say that instead of oak, which costs 10 rubles, we use poplar, which costs 5 rubles. Now, to produce 100 chairs you need to spend not 50 rubles, but 25.
Other indicators
There are also a number of secondary indicators. Total costs are a combination of variable and fixed costs. Let’s say that for one day of renting a building, an entrepreneur pays 100 rubles and produces 200 chairs, the cost of which is 5 rubles. Total costs will be equal to 100+(200*5)=1100 rubles per day.
Beyond that, there are plenty of averages. For example, average fixed costs(how much you need to pay for one unit of production).
Costs are divided into constants and variables depending on the relationship to changes in production volume. Costs are divided into independent and dependent on the volume of products produced.
Part total costs there are constants. Fixed costs do not depend on the volume of production; they exist even at zero production volume. Fixed costs include cash costs, the amount of which a company cannot change when producing a product in the short term.
These are the previous obligations of the enterprise (interest on loans, etc.), taxes, depreciation, security payments, rent, equipment maintenance costs with zero production volume, salaries of management personnel, etc.
Fixed costs are divided into three groups:
completely fixed costs (costs of inactivity), which are possible even when there is no activity, for example, depreciation of fixed assets;
fixed costs for supporting activities that occur only during the implementation of activities, for example, costs for electricity, lighting, wages of general plant personnel;
semi-fixed costs that do not change until a certain volume of production is achieved. With a subsequent increase in production volume, these costs change abruptly. This occurs when capacity utilization is 100% and market capacity requires increased production. Enterprises purchase new machines and equipment, build new buildings, which increases the cost of fixed assets and abruptly changes the cost per unit of production through an increase in depreciation charges.
Variable costs depend on the quantity of products produced and consist of the costs of raw materials, materials, wages to workers, etc. The sum of constants and variable costs forms gross costs - the amount of cash costs for production certain type products.
Classification of variable costs:
proportional variables that change in direct accordance with changes in the volume of activity;
regressive variables that grow more slowly than output;
progressive variables that grow faster than production increases.
To measure the cost of producing a unit of output, the categories of average, average fixed and average variable costs are used. Average costs are equal to the quotient of total costs divided by the number of products produced. Average fixed costs are determined by dividing fixed costs by the number of products produced. Average variable costs are formed by dividing variable costs by the number of products produced.
At the beginning of the production process, variable costs are quite high, then their level stabilizes, but subsequently begins to increase under the influence of the law of diminishing marginal productivity of labor
What is of interest to an entrepreneur is not only the total cost of the goods or services he produces, but also average costs , i.e. the firm's costs per unit of output. When determining the profitability or unprofitability of production, average costs are compared with price.
Average fixed costs determined by the ratio of total fixed costs to the amount of product produced. They decrease with a gradual increase in the amount of product produced. If a small quantity of products is produced, then for each unit of product there is large number fixed costs. With an increase in production volume, the share of fixed costs per unit of production decreases, which leads to a decrease in average fixed costs per unit of production and their value tends to zero.
Average variable costs are calculated by dividing the total variable costs by the corresponding quantity of products produced.
Average total costs is the quotient of total costs divided by the volume of production, or the sum of average fixed and average variable costs. They are important for the enterprise, as they serve as the basis for the price of a unit of production.
Except listed types, marginal costs are calculated.
Limit are the incremental costs associated with producing an additional unit of output. Typically, each additional unit of production is associated with a change in the amount of variable production costs. The value of the marginal costs of production is extremely high, since it allows you to determine those costs, the value of which the enterprise can control most directly, more precisely than the marginal costs; there is not a single indicator that can be used when calculating the saved resources in the event of a reduction in production volume for each last unit of production.
The previously discussed category of “marginal costs” is of fundamental importance for determining the volume of production that brings maximum profit and studying the efficiency of resource allocation. While in conditions perfect competition(many small producers producing identical goods, and each of them does not affect the market price) the income from the last additional unit of goods sold exceeds the marginal cost of this unit of goods, the profit of the enterprise will increase. For any enterprise, the most profitable will be the production and sale of such volume of products when there is equality of additional income and marginal costs. The last good produced and sold will equalize marginal cost and unit price, since selling more output will not bring additional profit. The company will strive to maximum profit when producing goods whose marginal costs are below the market price, and will stop producing goods whose marginal costs exceed the market price.
The decision regarding production volume is usually of a marginal nature - whether to produce a few more or fewer units. A distinction must be made between total marginal cost and average marginal cost.
Calculation of marginal costs is necessary to ensure a reasonable increase in production.
Marginal costs serve as the basis for determining the optimal volume of production and the limits of its expansion to obtain the highest possible profit.
IN real life such types of costs as alternative (opportunity) costs are also calculated- missed opportunities. These are the means that a company gives up when it uses its resources. and which are modified in terms of the benefits that are foregone by using these resources in an optimal manner. They represent the costs associated with lost opportunities to make the best use of the enterprise's resources.
Opportunity costs arise from the possibility of choosing between certain economic decisions.
Thus, you can use the profit of the enterprise in various ways, for example, capitalize or spend the profit on personal consumption. In this case, there will be a loss of opportunities to make a profit in the future period.
Opportunity costs are hidden, but they must be taken into account when developing strategic economic decisions.
In addition to those mentioned, the company also has transaction costs . They are related to foreign economic activity enterprises. Transactions with partners, negotiations, searching for information, concluding contracts, monitoring its use - all these are transactions that require additional costs. If the amount transaction costs more income enterprises, then production becomes impossible.
The total costs of an enterprise are the sum of fixed and variable costs.
In the previous paragraph, in search of the optimal combination of factors of production, the firm could change both labor and capital. However, in practice, it is much easier for a company to hire additional workers than to purchase new equipment - capital. The latter requires more time. In this regard, in production theory, a distinction is made between short and long periods.
In the long run, a firm can change all factors of production to increase output. In the short run, some factors of production are variable, while others are constant. Here, to increase output, the firm can measure only variable factors. Prices for factors of production in the short run are assumed to be fixed. It follows that all costs of a company in a short period can be divided into constant and variable.
Fixed costs(FC) are costs whose value doesn't change together with a change in output volume, i.e. These are the costs of fixed factors of production. Typically fixed costs include depreciation, rent, interest on loans, wages management and office employees, etc. Fixed costs usually include implicit costs.
Variable costs(VC) are costs whose value is changing together with a change in output volume, i.e. These are the costs of variable factors of production. These usually include wages of production workers, costs of raw materials and materials, electricity for technological purposes, etc.
In theoretical microeconomic models, variable costs usually include labor costs, and fixed costs usually include capital costs. From this point of view, the value of variable costs is equal to the product of the price of one man-hour of labor (PL) by the number of man-hours (L):
In turn, the value of fixed costs is equal to the product of the price of one machine-hour of capital (PK) by the number of machine-hours (K):
The sum of fixed and variable costs gives us total costs(TC):
F.C.+ V.C.= TC
In addition to total costs, you also need to know average costs.
Average fixed costs(AFC) are fixed costs per unit of output:
Average Variable Costs(AVC) are variable costs per unit of output:
Average total costs(AC) is the total costs per unit of output or the sum of average fixed and average variable costs:
When analyzing a firm's market behavior, marginal costs play an important role. Marginal Cost(MC) reflect the increase in total costs with an increase in output (q) by one unit:
Since only variable costs increase with output growth, the increment in total costs is equal to the increment in variable costs (DTC=DVC). We can therefore write:
You can put it this way: marginal costs are the costs associated with producing the last unit of output.
Let's give an example of cost calculation. Let there be 10 units upon release. variable costs are 100, and at output 11 units. they reach 105. Fixed costs do not depend on output and are equal to 50. Then:
In our example, output increased by 1 unit. (Dq=1), while variable and total costs increased by 5 (DVC=DTC=5). Consequently, an additional unit of output required an increase in costs by 5. This is the marginal cost of producing the eleventh unit of output (MC = 5).
If the total (variable) cost function is continuous and differentiable, then the marginal costs for a given volume of output can be determined by taking the derivative of this function with respect to output:
or 
Average total costs(AC – average costs or ATC ) show the total costs per unit of output of the corresponding volume of output and are determined by the following formula:
Average costs are cost price products. If we compare AC with the price of a product, we can conclude whether the production of this product at a given output volume is profitable (or unprofitable).
Since total costs can be represented as the sum of fixed and variable costs ( TC = FC + VC), then the value of average total costs is determined as the sum of average constant (AFC) and average variable costs (AVC):
Average fixed costs ( A.F.C. – average fixed costs) – these are fixed costs per unit of production corresponding to the output volume. They are calculated as follows:
As output increases, average fixed costs will decrease.
Average Variable Costs(AVC – average variable costs) represent variable costs per unit of production and are obtained by dividing variable costs by the volume of output:
The calculation and dynamics of changes in average variable costs will be considered by the company's management in the event of a decision to close or continue unprofitable production, the specifics of which will be considered in the next question.
4. Graphical display of costsM.C. , AC, AVC AndA.F.C. , their relationship
in the short term
In the short term, there is a certain interdependence between marginal, average total and average variable and fixed costs.
First, we will describe the graphs of these costs separately.
Curve marginal cost MS is an arcuate curve that initially decreases, but then reaches a minimum value as the firm's variable costs increase V.C., begins to increase. In the future, the more units of output are produced, the steeper the curve will rise MS.
General average speakers And total variable costs ABC also have an arched shape, and average fixed costs AFC– are graphically displayed in the form of a hyperbola approaching the coordinate axes. Such arcuate shapes are explained by the law of marginal productivity of labor (or diminishing returns).
Rice. 36. Family of average and marginal costs
If we combine all cost curves on one graph (see Fig. 36), we can highlight following features:
1) The curves of average AC and average variable costs AVC become closer and closer as output increases. This is because AFC's short-run average fixed cost decreases as production increases (a hyperbolic graph of the curve). Average total costs are the sum of average constants and variables: , and therefore, with a decrease in one term ( A.F.C.) and increasing another ( AVC), AC as output increases, it will become increasingly closer to AVC.
2) Average total cost curves ( AC) and average variable costs ( AVC) intersect with the marginal cost curve ( MS) at their minimum point:
Let's look at the ratios MS And ABC. If the variable costs per unit of output are higher than the marginal costs, then they decrease with each subsequent unit of output produced. In the event that AVC getting smaller MS, then the value AVC starts to increase. Therefore, equality arises between these parameters (in the figure this is the point A), When AVC takes the minimum value.
The connection between MS And AC. In average total costs, the determining role is played by average variable costs, therefore the patterns that are valid for the ratio MS And AVC, are also valid for MS And AC.
Analysis of the behavior of total and average costs is one of the key stages of production planning and adoption of appropriate management decisions. Control over them is important not only from the point of view of controlling profitability, but also for forming a pricing policy.
Average Variable Costs
Average variable costs ( English Average Variable Cost, AVC) or variable costs per unit of production are calculated as the ratio of total variable costs to the volume of production.
Formula
where TVC is total variable costs, Q is the volume of production.
Behavior
The behavior of average variable costs depends on various factors, so it is advisable to consider it with an example.
The table presents data on the costs of Integral LLC.
Typically, as production volume increases, average variable costs gradually decrease, reach a minimum, and then begin to gradually increase, as shown in the graph below.
The U-shape of the curve is explained by the principle of variable proportions.
- While the enterprise increases production volume and approaches full capacity utilization, average variable costs decrease as the efficiency of use of production equipment increases.
- When full load is achieved, costs reach their minimum.
- When design capacity is exceeded, the efficiency of production equipment decreases due to increased wear, which leads to an increase in average variable costs.
Average fixed costs
Average fixed costs ( English Average Fixed Cost, AFC) are essentially fixed costs per unit of production.
Formula
where TFC is the total fixed costs, Q is the volume of production.
Behavior
Average fixed costs vary inversely with the volume of production. With an increase in production volume they decrease, and with a decrease, on the contrary, they increase. Let's assume that the total fixed costs of the enterprise are $750,000. per quarter. With a quarterly production volume of 150 units. products, fixed costs per unit of production will be 5,000 USD, and with a volume of 250 units. already 3,000 USD This relationship is graphically demonstrated in the diagram.
With an increase in production volume, average fixed costs gradually decrease, but they never become equal to 0.
Average total costs
Average total costs ( English Average Total Cost, ATC) or cost per unit of production is one of the key indicators of how effectively a business is using its limited resources.
Formula
where TC is the total costs, Q is the volume of production.
An alternative calculation formula is as follows.
Behavior
The behavior of average total costs varies depending on the portion of the U-shaped curve, as demonstrated in the graph below.
Until full capacity utilization is achieved, average total costs decrease because both average fixed and average variable costs decrease in this area.
When capacity is loaded above full capacity, it can either increase or decrease. It depends on whether average variable costs will increase faster than average fixed costs decrease or not. For this reason, the point of full capacity utilization is not always the minimum of average total costs.