Costs of a manufacturing enterprise. Costs in the long run. Methods to reduce production costs

21.09.2019

(measured in monetary terms for simplicity) used in the process economic activity enterprises for (for) a certain time stage. Often in everyday life, people confuse these concepts (costs, expenses and expenses) with the purchase price of a resource, although such a case is also possible. Costs, costs and expenses have not historically been separated in Russian. IN Soviet time economics was an “enemy” science, so there was no significant further development there was nothing in this direction, except for the so-called. "Soviet economy".

In world practice, there are two main schools of understanding costs. This is a classic Anglo-American, which can include Russian and continental, which rests on German developments. The continental approach structures the content of costs in more detail and therefore is becoming more widespread throughout the world, creating a high-quality basis for tax, accounting and management accounting, costing, financial planning and controlling.

Cost Theory

Clarifying definitions of concepts

To the above definition, you can add more clarifying and delimiting definitions of concepts. According to the continental definition of the movement of value flows at different levels of liquidity and between different levels of liquidity, the following distinction can be made between the concepts of negative and positive value flows of organizations:

In economics, four basic levels of value flows can be identified with respect to liquidity (pictured from bottom to top):

1. Available capital level(cash, highly liquid funds (checks..), operational bank accounts)

payments And payments

2. Level of money capital(1. Level + accounts receivable - accounts payable)

Movement at this level is determined costs and (financial) revenues

3. Level of productive capital(2. Level + production required subject capital (tangible and intangible (for example, patent)))

Movement at this level is determined costs And production income

4. Net capital level(3. Level + other subject capital (tangible and intangible (for example, accounting program)))

Movement at this level is determined expenses And income

Instead of the level of net capital, you can use the concept level of total capital, if we take into account other non-material capital (for example, the company’s image..)

The movement of values between levels is usually carried out at all levels at once. But there are exceptions when only a few levels are covered and not all. They are indicated in the image by numbers.

I. Exceptions to the movement of value flows of levels 1 and 2 are due to credit transactions (financial delays):

4) payments, not costs: repayment of credit debt (="partial" loan repayment (NAMI))

1) costs, non-payment: the appearance of credit debt (=the appearance (of US) of a debt to other participants)

6) payment, non-receipt: entry of receivables (="partial" repayment of debt by other participants for a product/service sold (by US))

2) receipts, non-payment: appearance of receivables (= provision (by OUR) of installment plans to pay for the product/service to other participants)

II. Exceptions to the movement of value flows of levels 2 and 4 are due to warehouse operations (material delays):

10) costs, not expenses: payment for credited materials that are still in the warehouse (= payment (US) by debit regarding “stale” materials or products)

3) expenses, not costs: delivery of still unpaid materials from the warehouse (to (OUR) production)

11) receipts, not income: pre-payment for the subsequent delivery of ((OUR) “future” product by other participants)

5) income, non-receipts: launch of an independently produced installation (="indirect" future receipts will create an influx of value for this installation)

III. Exceptions in the movement of value flows of levels 3 and 4 are due to the asynchrony between the intra-periodic and inter-periodic production (main) activities of the enterprise and the difference between the main and related activities of the enterprise:

7) expenses, not expenses: neutral expenses (= expenses of other periods, non-production expenses and unusually high expenses)

9) costs, not expenses: calculator costs (= write-offs, interest on equity, leasing of own real estate to an enterprise, owner’s salary and risks)

8) income, non-production income: neutral income (= income from other periods, non-production income and unusually high income)

It was not possible to detect production income that was not income.

Financial balance

The foundation of financial balance Any organization can be simplified into the following three postulates:

1) In the short term: superiority (or compliance) of payments over payments.
2) In the medium term: the superiority (or compliance) of revenues over costs.
3) In the long term: the superiority (or matching) of income over expenses.

Costs are the “core” of expenses (the main negative value flow of an organization). Production (core) income can be classified as the “core” of income (the main positive value flow of an organization), based on the concept of specialization (division of labor) of organizations in one or more types of activities in society or the economy.

Types of costs

Third-party company services
Other

A more detailed structuring of costs is also possible.

Types of costs

By impact on the cost of the final product
- indirect costs
In relation to production capacity utilization
In relation to the production process
- Production costs
- Non-production costs
Constant over time
- time-fixed costs
- episodic costs
By type of cost accounting
- accounting costs
- calculator costs
By divisional proximity to manufactured products
- overhead costs
- general business expenses
By importance to product groups
- group A costs
- group B costs
By importance to manufactured products
- product costs 1
- product costs 2

By importance for decision making
- relevant costs
- irrelevant costs
By removability
- avoidable costs
- sunk costs
By adjustability
- adjustable
- unregulated costs
Refund possible
- return costs
- sunk costs
By cost behavior
- incremental costs
- marginal (marginal) costs
Cost to quality ratio
- corrective action costs
- costs of preventive actions

Sources

Kistner K.-P., Steven M.: Betriebswirtschaftlehre im Grundstudium II, Physica-Verlag Heidelberg, 1997

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Production costs- this is a set of expenses that enterprises incur in the process of production and sales of products.

Production costs can be classified according to many criteria. From the firm's perspective, individual production costs are identified. They directly take into account the expenses of the business entity itself. Entrepreneurial firms have different individual production costs. In some cases, industry average and social costs are taken into account. Social costs are the costs of production certain type and the volume of production from the perspective of the entire national economy.

There are also production costs and circulation costs, which are associated with the phases of capital movement. Production costs include only those costs that are directly related to material creation, to the production of a product. Distribution costs include all costs caused by the sale of manufactured products. They include additional and net distribution costs.

Additional distribution costs are the costs associated with transportation, warehousing and storage of products, their packaging and packaging, and bringing the products to the direct consumer. They increase the final cost of the product.

Advertising costs, rental of retail premises, costs of maintaining sellers and sales agents, counting workers form net costs of circulation, which do not form new value.

In conditions market relations The economic understanding of costs is based on the problem of limited resources and the possibility of their alternative use (economic costs).

From the standpoint of an individual firm, economic costs are the costs that the firm must bear in favor of the supplier of inputs in order to divert them from use in alternative industries. Also, costs can be both external and internal. Costs in monetary form that a company incurs in favor of suppliers of labor services, fuel, raw materials, auxiliary materials, transport and other services are called external, or explicit (actual), costs. In this case, resource suppliers are not the owners of this company. Explicit costs are fully reflected in the accounting records of enterprises, and therefore they are called accounting costs.

At the same time, the company can use its own resources. In this case, costs are also inevitable. The costs of one's own resource and one that is independently used are unpaid, or internal, implicit (implicit) costs. The company considers them as equivalent to the cash payments that would be received for an independently used resource with its most optimal use.

Implicit costs cannot be identified with the so-called sunk costs. Sunk costs are costs that are incurred by the company once and cannot be returned under any circumstances. Sunk costs are not considered alternative costs; they are not taken into account in the company's current costs associated with its production activities.

There is also such a criterion for classifying costs as time intervals; during the second they take place. From this point of view, production costs in the short term are divided into constant and variable, and in the long term all costs are represented by variables.

Fixed costs(TFC) - those actual costs that do not depend on the volume of output. Fixed costs occur even when products are not produced at all. THEY are connected with the very existence of the company, i.e. with expenses for general content factory or plant (payment of rent for land, equipment, depreciation charges for buildings and equipment, insurance premiums, property tax, salaries to senior management personnel, payments on bonds, etc.) In the future, production volumes may change, but fixed costs will remain unchanged. Collectively, fixed costs are the so-called overhead costs.

Variable costs(TVC) - those costs that change with changes in the quantity of products produced. Variable costs include expenses for raw materials, materials, fuel, electricity, payment for transport services, payment for most of the labor resources (salaries).

They also distinguish between total (total), average and marginal costs.

Cumulative, or total, production costs (Fig. 11.1) consist of the sum of all constant and variable costs: TC = TFC + TVC.

Except total costs, the entrepreneur is interested in average costs, the value of which is always indicated per unit of production. There are average total (ATC), average variable (AVC) and average fixed (AFC) costs.

Average total costs(ATC) is the total cost per unit and is usually used for comparison with price. They are defined as the quotient of total costs divided by the number of units produced:

Average variable costs(AVC) is a measure of the cost of a variable factor per unit of output. They are defined as the quotient of gross variable costs divided by the number of units of production: AVC=TVC/Q.

Average fixed costs(AFC), fig. 11.2 - indicator fixed costs per unit of output. They are calculated using the formula AFC=TFC/Q.

In the theory of firm costs, an important role belongs to marginal costs (MC) - the costs of producing an additional unit of output in addition to the quantity already produced. MC can be determined for each additional unit of production by attributing changes in the amount of total costs to the number of units of production that caused these changes: MC=ΔTC/ΔQ.

The long-term period in the activity of a company is characterized by the fact that it is able to change the amount of all production factors used, which are variable.

The long-term ATC curve (Fig. 11.3) shows the lowest cost of production of any given volume of output, provided that the firm had the necessary time to change all its production factors. The figure shows that increasing production capacity at the enterprise will be accompanied by a decrease in the average total costs of producing a unit of output until the enterprise reaches the size corresponding to the third option. A further increase in production volumes will be accompanied by an increase in long-term average total costs.

The dynamics of the long-run average total cost curve can be explained using the so-called economies of scale.

As the size of the enterprise grows, it can be distinguished whole line factors determining the reduction of average production costs, i.e. giving positive economies of scale:

labor specialization;
specialization of management personnel;
efficient use of capital;
production of by-products.

Diseconomies of scale mean that over time, expansion of firms can lead to negative economic consequences and, therefore, to increased unit production costs. The main reason for the occurrence of negative economies of scale is associated with certain management difficulties.

In the economic practice of our country, the category “cost” is used to determine the value of production costs. Under cost of production understand the cash current costs of enterprises for its production and sale. Cost shows how much it costs a given enterprise to manufacture and sell products. The cost reflects the level of technology, organization of production and labor at the enterprise, and business results. Its comprehensive analysis enables enterprises to more fully identify unproductive expenses, various types of losses, and find ways to reduce production costs. Cost is a consequence of the economic efficiency of capital investments, the introduction of new equipment and production technology, and equipment modernization. When developing technical measures, it allows you to choose the most profitable, optimal options.

Based on the level and location of cost formation, a distinction is made between individual and industry average costs. Individual cost is the cost of production and sales of products that accumulate at each individual enterprise. Industry average cost is the cost of production and sales of products, which is the average for the industry.

According to the calculation methods, the cost is divided into planned, standard and actual. Planned cost usually means cost determined on the basis of planned (estimated) calculation of individual costs. The standard cost of a product shows the costs of its production and sale, calculated on the basis of current cost standards in effect at the beginning of the reporting period. It is reflected in standard calculations. The actual cost expresses the costs incurred in the reporting period for the production and sale of a certain type of product, i.e. actual resource costs. The actual cost of production of specific products is recorded in reporting estimates.

Based on the degree of completeness of cost accounting, a distinction is made between production and commercial costs. Production cost consists of all costs associated with the manufacture of products. Non-production costs (costs of containers, packaging, delivery of products to the destination, sales costs) are taken into account when determining commercial costs. The sum of production and non-production costs forms the total cost.

The cost corresponds to accounting costs, i.e. does not take into account implicit (imputed) costs.

The cost of products (works, services) of an enterprise includes costs associated with use in the production process natural resources, raw materials, materials, fuel, energy, fixed assets, labor resources and other costs for its production and sale.

Other elements of cost are the following costs and deductions:

for preparation and development of production;
related to the maintenance of the production process;
related to production management;
to ensure normal working conditions and safety precautions;
for payments provided for by labor legislation for unworked time; payment for regular and additional vacations, payment for working time for performing government duties;
contributions to state social insurance and Pension Fund from labor costs included in the cost of production, as well as the employment fund;
contributions for compulsory health insurance.

Basic concepts of the topic

Production costs. Distribution costs. Net and additional distribution costs. Opportunity costs. Economic and accounting costs. Explicit and implicit costs. Sunk costs. Fixed and variable costs. Gross, average and marginal costs. Manufacturer's gain. Isocosta. Producer equilibrium. Effect of scale. Positive and negative economies of scale. Long-run average costs. Short-term costs.

Control questions

What is meant by production costs?
How are distribution costs divided?
What is the difference between economic and accounting costs? Explain their purpose.
What are the costs called, the value of which does not depend on the volume of output?
What are variable costs? Give an example of these costs.
Are so-called sunk costs taken into account in current costs?
How are gross (total), average and marginal costs determined and what is their essence?
What is the relationship between marginal cost and marginal productivity (marginal product)?
Why are average and marginal cost curves U-shaped in the short run?
Knowing what costs allows us to determine the amount of gain for the producer (surplus for the producer)?
What is meant by product cost and what types of it are used in domestic business practice?
What costs (explicit or implicit) does the category “cost” correspond to?
What is the name of a straight line that shows all combinations of resources whose use requires the same costs?
What does the descending nature of the isocost mean?
How can we explain the state of equilibrium of the producer?
If the combination of factors applied minimizes costs for a given amount of output, then it will maximize output for a given amount of costs. Explain this with a graph.
What is the name of the line that defines the long-term expansion path of a firm and passes through the tangency points of the isocosts and the corresponding isoquants?
What circumstances cause positive and diseconomies of scale?

Firm. Production costs and their types.

Parameter name	Meaning
Article topic:	Firm. Production costs and their types.
Rubric (thematic category)	Production

Firm(enterprise) is an economic unit that realizes its own interests through the production and sale of goods and services through the systematic combination of factors of production.

All firms can be classified according to two main criteria: the form of ownership of capital and the degree of concentration of capital. In other words: who owns the company and what is its size. Based on these two criteria, various organizational and economic forms are distinguished entrepreneurial activity. This includes public and private (sole proprietorships, partnerships, joint stock) enterprises. According to the degree of concentration of production, small (up to 100 people), medium (up to 500 people) and large (more than 500 people) enterprises are distinguished.

Determining the value and structure of the costs of an enterprise (firm) for the production of products that would ensure the enterprise a stable (equilibrium) position and prosperity in the market is the most important task economic activity at the micro level.

Production costs - These are expenses, monetary expenditures that are extremely important to carry out to create a product. For an enterprise (firm), they act as payment for acquired factors of production.

The majority of production costs comes from the use of production resources. If the latter are used in one place, they cannot be used in another, since they have such properties as rarity and limitation. For example, the money spent on buying a blast furnace for the production of pig iron cannot simultaneously be spent on the production of ice cream. As a result, by using a resource in a certain way, we lose the opportunity to use this resource in some other way.

Due to this circumstance, any decision to produce something makes it extremely important to refuse to use the same resources for the production of some other types of products. Thus, costs are opportunity costs.

Opportunity Cost- these are the costs of producing a product, assessed in terms of the lost opportunity to use the same resources for other purposes.

From an economic point of view, opportunity costs can be divided into two groups: “explicit” and “implicit”.

Explicit costs- These are opportunity costs that take the form of cash payments to suppliers of factors of production and intermediate goods.

Explicit costs include: workers' wages (cash payments to workers as suppliers of the production factor - labor); cash costs for the purchase or payment for the rental of machines, machinery, equipment, buildings, structures (cash payments to capital suppliers); payment of transportation costs; utility bills (electricity, gas, water); payment for services of banks and insurance companies; payment to suppliers of material resources (raw materials, semi-finished products, components).

Implicit costs - this is the opportunity cost of using resources owned by the firm itself, ᴛ.ᴇ. unpaid expenses.

Implicit costs are presented as:

1. Cash payments, which the company could obtain with a more profitable use of its resources. This can also include lost profits ("costs of lost opportunities"); wages, which the entrepreneur could get by working somewhere else; interest on capital invested in securities; rent payments for land.

2. Normal profit as the minimum remuneration to an entrepreneur that keeps him in the chosen industry.

For example, an entrepreneur engaged in the production of fountain pens considers it sufficient for himself to receive a normal profit of 15% of the invested capital. And if the production of fountain pens gives the entrepreneur less than normal profit, then he will move his capital to industries that give at least normal profit.

3. It is important to note that for the owner of capital, implicit costs are the profit that he could have received by investing his capital not in this, but in some other business (enterprise). For a peasant who owns land, such implicit costs will be the rent that he could receive by renting out his land. For an entrepreneur (including a person engaged in ordinary labor activity) the implicit costs will be the salary that he could have received for the same time, working for hire at any company or enterprise.

However, Western economic theory includes the income of the entrepreneur in production costs. Moreover, such income is perceived as a payment for risk, which rewards the entrepreneur and encourages him to keep his financial assets within the boundaries of this enterprise and not divert them for other purposes.

Production costs, including normal or average profit, are economic costs.

Economic or opportunity costs in modern theory are considered to be the costs of a company incurred in the conditions of making the best economic decision on the use of resources. This is the ideal to which a company should strive. Undoubtedly, real picture the formation of general (gross) costs is somewhat different, since any ideal is difficult to achieve.

It must be said that economic costs are not equivalent to those with which accounting operates. IN accounting costs The entrepreneur's profit is not included at all.

Production costs, which are used by economic theory, are distinguished from accounting by the assessment of internal costs. The latter are associated with costs that are incurred through the use of own products in the production process. For example, part of the harvested crop is used to sow the company's land. The company uses such grain for internal needs and does not pay for it.

In accounting, internal costs are accounted for at cost. But from the standpoint of setting the price of a released product, costs of this kind should be assessed at the market price of that resource.

Internal costs - These are associated with the use of the company’s own products, which turn into a resource for the company’s further production.

External costs - This is the cost of money that is used to acquire resources that are the property of those who are not the owners of the company.

Production costs, which are realized in the production of a product, can be classified not only depending on what resources are used, be it the resources of the company or the resources that had to be paid for. Another classification of costs is possible.

Fixed, variable and total costs

The costs that a firm incurs in producing a given volume of output depend on the possibility of changing the amount of all employed resources.

Fixed costs(FC, fixed costs)- these are costs that do not depend in the short term on how much the company produces. Οʜᴎ represent the costs of its constant factors of production.

Fixed costs are associated with the very existence of the company's production equipment and must be paid for this, even if the company does not produce anything. A firm can avoid the costs associated with its fixed factors of production only by completely ceasing its activities.

Variable costs(US, variable costs)- These are costs that depend on the volume of production of the company. Οʜᴎ represent the costs of the firm's variable factors of production.

These include costs of raw materials, fuel, energy, transportation services, etc. The majority of variable costs typically come from labor and materials. Since the costs of variable factors increase as output increases, variable costs also increase with output.

General (gross) costs for the quantity of goods produced - these are all the costs at a given point in time necessary for the production of a particular product.

In order to more clearly determine the possible production volumes at which the company guarantees itself against excessive growth of production costs, the dynamics of average costs is examined.

There are average constants (AFC). average variables (AVC) PI average general (PBX) costs.

Average fixed costs (AFS) represent an attitude fixed costs (FC) to production volume:

AFC = FC/Q.

Average variable costs (AVQ represent the ratio of variable costs (VC) to production volume:

AVC=VC/Q.

Average total costs (PBX) represent the total cost ratio (TC)

to production volume:

ATS= TC/Q =AVC + AFC,

because TS= VC + FC.

Average costs are used when deciding whether to produce a given product at all. In particular, if the price, which represents the average income per unit of output, is less than AVC, then the firm will reduce its losses by suspending its activities in the short term. If the price is lower ATS, then the firm receives negative economics; profits and should consider permanent closure. Graphically this situation should be depicted as follows.

If average costs are lower than the market price, then the company can operate profitably.

To understand whether producing an additional unit of output is profitable, it is critical to compare the resulting change in income with the marginal cost of production.

Marginal cost(MS, marginal costs) - These are the costs associated with producing an additional unit of output.

In other words, marginal cost is an increase TS, the firm must go to ĸᴏᴛᴏᴩᴏᴇ in order to produce another unit of output:

MS= Changes in TS/ Changes in Q (MC = TC/Q).

The concept of marginal cost is strategic because it identifies costs that a firm can directly control.

The firm's equilibrium point maximum profit is achieved in the case of equality of marginal revenue and marginal costs.

When a firm has reached this ratio, it will no longer increase production, output will become stable, hence the name - equilibrium of the firm.

Firm. Production costs and their types. - concept and types. Classification and features of the category "Company. Production costs and their types." 2017, 2018.

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 of the majority 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 rent payments for land, interest on capital invested in securities, etc. 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.

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 is the amount of money required to divert a particular 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: To production costs All real, actual expenses should be attributed 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 the volume of production output): 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 they wear 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. The production volume corresponding to the minimum average total cost is called the point of technological optimism.

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 the minimum value of 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 increase in the use of a factor of production, while the rest remain unchanged, sooner or later a point is reached, starting from which the additional use of variable factors leads to a decrease in the increase in production.

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 character 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, 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. In condition 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 the total revenue of an enterprise or firm is equal to total costs, calculated as alternative costs. 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 resources are used more efficiently at a given enterprise.

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. The 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.

Costs of a manufacturing enterprise. Costs in the long run. Methods to reduce production costs

Cost Theory

Clarifying definitions of concepts

Financial balance

Types of costs

Types of costs

Sources

See also

See what “Costs” are in other dictionaries:

2.3.1. Production costs in a market economy.