The classification of enterprise costs distinguishes between fixed and variable costs. The former do not depend on the level of manufactured products or services provided. The second are costs, the value of which is proportional to the volume of production, that is, it changes with changes in the output of products. There are different types of such expenses. Let's tell you about everything in more detail.
Characteristics of production costs
Any organization incurs expenses in the course of its activities. Even a newly opened enterprise, having not yet made a profit, is already spending money. After all, production of products and subsequent sales are impossible without opening a current account, purchasing equipment and raw materials, renting production and retail and warehouse premises. And this is only a small part of the upcoming costs.
Some of them relate to costs that do not depend on the volume of production and downtime of the company, and are logically called constant. Examples include:
- Rent for premises.
- Salaries of management, administrative personnel and insurance premiums from them.
- Credit interest.
- Services of banking institutions.
- Depreciation of non-production objects.
- Expenses for maintenance and operation of office premises.
- Utilities for retail and warehouse facilities.
- Other types of costs.
Others are costs, the value of which is proportional to the volume of production and changes in the direction of increase/decrease with an increase/decrease in the output of state enterprises or the provision of specialized services. Such a direct relationship is easily observed when calculating the output of state enterprises, where expenditure items are displayed in physical and monetary terms.
What costs depend on production volume:
- Costs of raw materials, materials, semi-finished products, spare parts, other types of inventory items used in the process of manufacturing GP/services.
- Utility payments for industrial premises.
- Expenses for maintenance and repair of main and auxiliary production facilities.
- Lease payments for industrial facilities.
- The cost of purchased fixed assets and small business equipment - equipment, machines, tools, etc. They are written off in the books of accounts through depreciation charges.
- Wages of workers in primary production.
- Deductions for insurance needs from the earnings of main workers.
- Other types of costs that vary in relation to production volume.
Economic Application of Fixed and Variable Costs
Analysis of the dependence of fixed costs on production volume in the long term allows us to identify minor changes as the output of SOEs increases. The calculations use an indicator of average fixed costs equal to:
Average Fixed Costs = Total amount of Fixed Costs / Output Volume.
From the formula one can trace the tendency that costs that do not depend on production volume can be called conditionally constant due to their decrease with increasing production volume. At the same time, variable costs continue to grow in direct proportion to the growth of production of goods, having a major impact on the formation of the future cost of goods/services. And sooner or later the manager faces the question: Will it be profitable to produce additional products?
To clearly understand the answer, you need to know what marginal costs are and how production volumes affect the costs of the enterprise. The increase in costs when producing one more unit of production is called marginal or marginal (extreme) production costs. For the calculation, indicators of variable expenses are used, since constant ones are considered conditionally unchanged. Calculation formula:
Marginal Cost = Change in Variable Cost / Change in Production Volume.
Conclusions:
- Total costs at zero production volume are equal to the enterprise's fixed costs.
- Specific fixed costs may decrease slightly with increasing production volume.
- As production volume increases, marginal costs change upward, based on the deviation of variable costs for each unit of goods.
Production volume is an important indicator of business development from an economic point of view. How to calculate it? What is the practical usefulness of knowing current production levels? In what cases is it advisable to optimize it and by what methods can this be done?
Definition
What is production volume? This is the total number of pieces (or other units of measurement - liters, tons, etc.) of a certain industrial product produced over a certain period of time, or the dynamics of product production, expressed in labor or cost indicators. This indicator has practical significance in two main aspects.
Accounting feasibility
Firstly, it is the provision of statistics to internal corporate structures, for accounting, for investors or, for example, a government customer. In this case, production volume is information that is mainly of a reference or analytical nature. The relevant data can be important for making key decisions for the enterprise in the field of management, investment, contracting, etc.
Strategic feasibility
Secondly, in economics there is the concept of “optimal production volume”. According to a common definition, it is an indicator that provides an enterprise with conditions for fulfilling contracts and corresponds to priorities in business development (or tasks set by the owner - a private individual, state, municipality, etc.). The key criteria here are meeting deadlines, minimum costs, and the maximum level of product quality.
Production volume analysis
Let us study the first direction of practical application of this type of information, such as production volume. Statistical and analytical study of the relevant performance indicators of enterprises, if we talk about private business, can be aimed at informing investors and government agencies (mainly the Federal Tax Service) about the real state of affairs at the factory. What business owners should pay attention to in this area first of all is the proper presentation of relevant information.
In this matter, you should be especially strict in dealing with documents related specifically to interaction with tax authorities. Thus, figures related to production volume must be provided according to standardized forms. Such as, for example, No. 1-P ("Quarterly reporting on the release of certain types of products"), No. 16 "(Movement of finished products"), etc.
Units of production volume
We noted above that the volume of production of an enterprise can be expressed in physical indicators (pieces, tons, etc.), labor or cost measures. If everything is clear with the first parameter, then what are the other two? Let's consider their features.
Valuation
As for the value expression of production volume, the main criterion here is gross costs. They, in turn, depend on such indicators as labor intensity, resource intensity, as well as the profitability of the product. Production volumes in this case are expressed in selling prices and are recorded, if required by financial statements, in form No. 1-P. VAT is usually not indicated.
Gross costs are a characteristic that implies the inclusion in statistics of both finished goods and those that are at some stage of the conveyor belt (but at the same time, some resources, labor, material, have already been spent to bring them to a specific stage).
Labor assessment
As for labor assessment, here the volume of production is expressed, as a rule, in the number of hours spent on the production of goods by certain specialists, as well as in the salaries of employees. As a rule, the corresponding area of statistics includes, as in the case of the cost criterion, finished and unfinished samples of products.
What is the practical significance of calculating the volume of output of goods in labor indicators? The fact is that working with cost indicators does not always give an objective idea of the state of affairs at the factory. The main reason is the structure of manufactured goods and their prices often change. The first may be due, as some experts believe, to the fact that the enterprise may not have the necessary equipment or other necessary resources, as well as an objective increase in the cost of producing goods. Thus, labor costs can become an indicator that complements the valuation of the cost of production of goods or acts as its alternative.
How to determine the production volume in hours? One of the common formulas is as follows. The total number of each type of goods is multiplied by the normalized time allotted for the production of one product.
If necessary, the indicators identified for the current year are compared with the figures of previous periods.
Let us note that measuring the volume of output of goods in hours has one significant drawback: using this method, it is quite difficult to take into account the direct content of labor functions and the complexity of performing work in relation to the qualifications of specialists.
Production and wages
In turn, it is possible to measure output in wages quite effectively. Using this indicator, it is possible, in turn, to differentiate labor depending on the level of qualifications of personnel and the work functions of specialists. Calculating the volume of output of goods in wages is also quite simple. The total quantity of products produced (in physical terms) is multiplied by the established wage standard per unit of goods.
In some cases, the analysis of production volume is supplemented by other types of calculations. Such as, for example, studying the dynamics of shipment of goods, comparing the identified figures with planned indicators, comparing them with previous periods. Another possible component of analysis is quality. Also, in some cases, it is possible, in the context of studying the volume of production, to study figures reflecting the sales of finished products. This kind of action can be useful if, for example, the task is to calculate the percentage of fulfillment of the company’s contractual obligations related to the supply of certain types of goods to consumers or partners.
Methods for researching production volume
How exactly can you use figures that reflect production volumes in physical, value or labor terms? Among Russian economists, a common method is comparison. For example, the indicators of the current year and previous years are compared. Another popular option is to compare the identified figures with those contained in the production plan or in the contract signed by the enterprise.
Form No. 1-P, which, as we noted above, is often used in accounting, contains a sufficiently large number of variables to conduct a comprehensive analysis of business performance. By comparing figures, it is possible, in particular, to identify the dynamics of the production of goods and calculate the growth rate of the enterprise.
Methods for calculating the optimal volume
The second direction for the practical use of such an indicator as the volume of goods produced is the optimization of the enterprise from the point of view of the business model. How to determine the optimal production volume? This can be done in several ways. In the Russian economic school there are two main ones. The first is based on working with gross indicators.
The second is based on a comparison of figures belonging to the limit category. In this case, calculations are carried out, as a rule, for each type of goods produced by the factory. It also implies that the company strives to maximize profits during the analyzed period. Another calculation factor: the optimal values for two parameters are identified - price and production volume itself. It is assumed that other elements of the factory's operations remain unchanged.
Sales volume factor
One of the methods simultaneously calculates production and sales volumes. In other cases, the condition is allowed that the total number of goods produced is equal to the number of samples sold. That is, sales dynamics do not matter. Whether or not to take into account the corresponding criterion depends on the type of enterprise and the specifics of the business. For example, if we are talking about retail in the consumer goods segment, then marketers, as a rule, still take into account such a factor as sales dynamics. If, for example, an enterprise assembles military equipment to order in accordance with existing contracts, the pace of implementation is usually of secondary importance.
Practice of calculating the optimal volume: accounting for sales
We noted above that the practical usefulness of figures reflecting the volume of output of goods can be expressed in the use of corresponding indicators simultaneously with those relating to sales results. When calculating the optimal production volume, we can also pay attention to this criterion. For example, a sales indicator may be identified, the achievement of which will provide zero profit or one that suits the company’s management in terms of profitability. In some cases, it is also possible to determine the maximum amount of profit in relation to the sale of goods and production volume. Which in most cases will be optimal.
Let's look at a simple example. The company produces tennis balls.
Let's agree that the selling price of each is 50 rubles.
Gross production costs for 1 unit - 150 rubles, 5 units - 200 rubles, 9 units - 300 rubles, 10 units - 380 rubles.
If the company sold 1 ball, then the profitability is negative, minus 100 rubles.
If 5, then positive, plus 50 rubles.
If 9, then there is also profitability, plus 150 rubles.
But if the company sold 10 units, then the profit will be only 120 rubles.
Thus, the optimal production volume of tennis balls is 9 units. Of course, with given criteria regarding gross costs. The formula for determining them can vary greatly depending on the specifics of production. The cost of producing additional units of goods is usually reduced per unit. However, the dynamics of their decrease is not always proportional to the number of products produced.
Limits
How to determine to what point it is advisable to increase production volume? The method that we also noted above will help us here. It involves studying the limits. Economists distinguish two main types of them: costs and income.
The basic rule that a business is recommended to adhere to is this: if the marginal amount of income (per unit of manufactured product) is higher than the maximum cost, then you can continue to increase production volume. But in practice, the profitability factor usually plays an important role in business. That is, the corresponding excess of income over costs should ensure, as an option, the company’s solvency for loans. In this case, the company will not be happy with zero profit, since it still pays some interest to the bank.
Production growth and new employees
Is it possible to achieve cost-effective growth in production by employing more and more employees? Not always. The fact is that the involvement of a new specialist in the work does not necessarily mean that the result of his work will be some kind of specific increase in the volume of goods produced. If, for example, an enterprise begins to hire more people, but does not pay due attention to the modernization of fixed assets, average labor productivity will most likely decrease. And therefore, the increase in production volume will not be commensurate with the increase in the number of employees.
At the same time, the imbalance between the dynamics of attracting new employees and the total number of goods produced by the company is not always accompanied by a drop in business profitability. It is quite possible that the company’s profit will still increase due to an increase in staff, but costs will remain unchanged (or increase slightly). This is realistic if, for example, demand on the market increases, and probably the price of the product will follow suit. The company will be able to optimally provide it by increasing its staff by several people.
A fairly common scenario in business, reflecting the dependence of optimization of indicators of the volume of goods produced on the number of employees employed at the enterprise, is a gradual reduction in the cost of producing a unit of goods. And after reaching a certain number of units produced, the corresponding indicator increases.
The cost of production of a product, which precedes the transition (from the moment the number of units produced of a product increases or decreases) of dynamics to increase or, conversely, to decrease, is called marginal. Changing production volume up or down, therefore, may not be advisable based on achieving the lowest cost figures with the current dynamics of production output.
In this case, fixed, variable, total, average and marginal costs are distinguished. The dynamics of total and average costs of an individual firm in the short term are shown in Table 7.
Table 7.Dynamics of total and average costs of an individual firm in the short term
| Total cost indicators | Average cost indicators | ||||||
| Number of products produced, units. Q | Sum of fixed costs TFC | Sum of variable costs TVC | Sum of total costs TC TC=TFC+TVC | Average fixed costs AFC AFC=TFC/Q | Average variable costs AVC AVC=TVC/Q | Average total costs ATC ATC=TC/Q | Marginal cost MC MC=change.TCMchange. Q |
| 100,00 | 90,00 | 190,00 | |||||
| 50,00 | 85,00 | 135,00 | |||||
| 33,33 | 80,00 | 113,33 | |||||
| 25,00 | 75,00 | 100,00 | |||||
| 20,00 | 74,00 | 94,00 | |||||
| 16,67 | 75,00 | 91,67 | |||||
| 14,29 | 77,14 | 91,43 | |||||
| 12,50 | 81,25 | 93,75 | |||||
| 11,11 | 86,67 | 97,78 | |||||
| 10,00 | 93,00 | 103,00 | |||||
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Fixed costs. Permanent doesn't change depending on changes in production volume.
Fixed costs are associated with the very existence of the firm's production equipment and must therefore be paid even if the company does not produce anything. Fixed costs, as a rule, include payment of obligations on bond issues, rental payments, part of deductions for depreciation of buildings and equipment, insurance premiums, as well as salaries to senior management personnel and future specialists of the company.
In Table 4, column 2 shows the firm's fixed costs, which are $100. Note that, by definition, fixed costs remain the same at all levels of production, including zero.
Variable costs. Variables are those costs whose value is is changing depending on changes in production volume. These include the costs of raw materials, fuel, energy, transportation services, most labor resources and similar variable resources.
In column 3 of table 4 we will find that the amount of variable costs varies in direct proportion to the volume of production. However, it should be noted that the increase in the amount of variable costs associated with an increase in production volume by one unit is not constant. At the beginning of the process of increasing production, variable costs will increase for some time at a decreasing rate; and this will continue until the fourth unit of production. Then variable costs will begin to increase at an increasing rate per each subsequent unit of output. This behavior of variable costs is determined by law of diminishing returns.
Total costs. Term "total cost" speaks for itself: it is the sum of fixed and variable costs for each given volume of production. In Table 4, it is shown in column 4. At zero production volume, the total cost is equal to the sum of the firm's fixed costs. Then, with the production of each additional unit of output - from 1 to 10 - the total cost changes by the same amount as the sum of the variable costs.
Figure 30 presents the fixed variable and total cost data contained in Table 4 graphically. Note that the sum of variable costs varies vertically from the horizontal axis, and the sum of fixed costs is added to the vertical dimension of the sum of variable costs each time to obtain the total cost curve.
The difference between fixed and variable costs is essential for every businessman. Variable costs are costs that an entrepreneur can control, the value of which can be changed over a short period of time by changing the volume of production. On the other hand, fixed costs are obviously beyond the control of the firm's management. Such costs are mandatory and must be paid regardless of production volume.
Average costs, or estimated costs
per unit of production
Of course, producers are not at all indifferent to the total amount of their costs, but they are no less worried about average costs, that is, costs are calculated per unit of production. In particular, it is the average cost indicators that are usually used for comparison with the price, which is always indicated per unit of production. Average fixed costs, average variable costs, and average total costs are shown in columns 5, 6, and 7 of Table 4. It is important for us to understand how these per unit figures are calculated and how they vary with changes in production volume.
1. Average fixed costs (AFC) are determined by dividing total fixed costs (TFC) by the corresponding quantity produced (Q). That is:
AFC=TFC/Q.
In Figure 25, we find that the AFC curve decreases continuously as output increases.
2. Average variable costs (AVC) are determined by dividing total variable costs (TVC) by the corresponding quantity of output (Q):
AVC=TVC/Q.
AVCs first fall, reach their lows, and then begin to rise. On the graph, this gives us a circular arc-shaped AVC curve, which is shown in Figure 25.
3. Average total cost (ATC) can be calculated by dividing the sum of total costs by the quantity produced (Q) or, more simply, by adding AFC and AVC for each of the 10 possible production volumes. That is:
ATC=TC/Q=AFC+AVC.
Marginal cost
Now we have to consider another very important concept of production costs - the concept of marginal cost. Marginal cost (MC) are called additional, or incremental, costs associated with the production of one more unit of output. MC can be determined for each additional unit of production by simply noticing the change in the amount of costs that resulted from the production of this unit.
MC = change in TC/change in Q.
Since in our example the “change in Q” is always equal to one, we defined MC as the cost of producing one more unit of output.
The concept of marginal cost is of strategic importance because it identifies those costs over which a firm can most directly control. More precisely, MC shows the costs that the firm will have to incur in the event of producing the last unit of output, and at the same time the costs that can be “saved” if the volume of production is reduced by this last unit. Average cost indicators do not provide such information. Decision-making regarding production volume is usually of a marginal nature, that is, the question of whether the firm should produce a few more units or a few less units of output is decided. Marginal cost reflects the change in costs that would result in an increase or decrease in output by one unit. Comparing marginal cost with marginal revenue, which is the change in revenue associated with increasing or decreasing output by one unit, allows a firm to determine the profitability of a particular change in scale of production.
Figure 33 shows the marginal cost graph. Notice that the marginal cost curve slopes down steeply, reaches its minimum, and then rises quite steeply. This reflects the fact that variable costs, and therefore total costs, first grow at a decreasing and then increasing rate (see Fig. 33 and columns 3 and 4 in Table 4).
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Short term: fixed capacities. Since different amounts of time are spent on changing the amount of resources used in the production process, it is necessary to distinguish between short-term and long-term periods. Short term – this is a period of time too short for the enterprise to be able to change its production capacity, but long enough to change the intensity of use of these fixed capacities.
The firm's production capacity remains constant in the short run, but output can be changed by using more or less human labor, raw materials, and other resources. Existing production capacities can be used more or less intensively within the short term.
Long-term period: changing capacities. From the point of view of existing firms, long term – this is a period of time long enough to change the quantities of all employed resources, including production capacity. From an industry's perspective, the long run also includes enough time for incumbent firms to disband and leave the industry and for new firms to emerge and enter the industry. If the short-term period is a period of fixed capacities, then the long-term period is a period of changing capacities.
Production costs in the short run
The production costs of any product by a given firm depend not only on the prices of the necessary resources, but also on technology - on the amount of resources needed for production. It is this, that is, the technological aspect of cost formation, that interests us at the moment. Over the short run, a firm can change its output by combining varying quantities of inputs with fixed capacities. Question: How will output change as more and more variable resources are added to the firm's fixed resources?
Law of Diminishing Returns
In its most general form, the answer to this question is given by the law of diminishing returns, also called "law of diminishing marginal product" or "the law of changing proportions."
This law states that, starting at a certain point, the successive addition of units of a variable resource (such as labor) to a fixed, fixed resource (such as capital or land) produces a diminishing surplus, or marginal, product for each successive unit of the variable resource.
In other words, if the number of workers servicing a given piece of machinery increases, then the growth in output will occur more and more slowly as more workers are involved in production.
The dependence of average fixed costs on changes in production volume is presented in Fig. 2.
Average fixed costs decline steadily as production volume increases. However, it is important to note that average fixed costs decrease much faster when volume changes from 1 to 2 units than when the same unit changes from 8 to 10 units.
Variable costs (V.C. English variable costs) change with the volume of output and are usually determined by this volume (Fig. 3). For example, the cost of metal used by a pipe mill will increase by 5% if pipe production volume increases by 5%.
The economic nature of variable costs is costs for the practical implementation of the activity for which the enterprise was created. These include the costs of raw materials, supplies, fuel, gas and electricity, and labor costs 1 .
1 However, part of the costs can be strictly delimited and unconditionally attributed to fixed or variable costs. Therefore, in the domestic practice of cost calculation, it is more common to use the concepts: conditionally fixed and conditionally variable costs.
Rice. 3. Schedule of changes in variable costs
Variable costs increase in proportion to production volume (with an increase in production volume from 1 to 2 units, variable costs increase from 50 to 78 monetary units)
Average variable costs (A VС) represent the ratio of variable costs (VC) to production volume.
The classification of costs into fixed and variable has a real economic meaning and is widely used in foreign and domestic practice to solve such management problems as:
1) assessment of the competitiveness of the enterprise;
2) regulation of the mass and increase in profit based on the relative reduction of certain expenses with an increase in revenue;
3) calculation of cost recovery and determination of the enterprise’s “margin of financial strength” in case of complications in market conditions or other difficulties;
4) calculating the price of a product using the marginal cost method. However, determining the optimal pricing strategy of an enterprise in the current market conditions is only possible with further analysis of changes in costs depending on the possible volumes of production of goods. In this regard, a distinction is made between gross, average and marginal costs.
The total amount of business expenses associated with gross (total) output is called gross (total) costs (TC– English total costs) and is equal to the sum of the enterprise’s fixed and variable costs.
TS = FC + US. (3)
Gross costs determine the lower limit of the price of the goods produced (Fig. 4).
Rice. 4. Gross cost schedule
Distance between straight line fixed costs (FC) and direct gross costs (TS) – this is the sum of variable costs 1.
1 In the cases considered, the cost behavior graph is represented by a straight line. However, changes in costs can also be described by a curve.
Average gross costs (AC) represent the cost of production per unit of output produced
This type of costs is of particular importance for understanding market equilibrium, since the entrepreneur seeks to minimize them. The average cost curve usually has U-shaped (Fig. 5). At first, average costs are quite high. This is due to the fact that large fixed costs are distributed over a small volume of production. As production increases, fixed costs are incurred over an increasing number of units of output, and average costs fall rapidly, reaching a minimum at the point M.
As production volume grows, the main influence on the value of average costs begins to be exerted not by fixed, but by variable costs. Therefore, due to the law of diminishing returns, the curve begins to go up. It should be noted that the average cost curve directly depends on the average fixed cost curves (AFC) and average variable costs (AVC).
The average cost curve is of great importance for the entrepreneur, since it allows you to determine at what volume of production the costs per unit of output will be minimal.
In the same industry there are not identical, but completely different firms with different scales, organization and technical base of production, and therefore with different levels of costs. Comparing the average costs of a company with the price level makes it possible to assess the position of this company in the market.
In conditions of perfect competition, at any prevailing price level, there is a kind of “external limit” at which producers either enter a given industry or are pushed out of it. An increase in prices causes the emergence of new firms and the retention of old ones. A reduction in prices leads to the fact that enterprises with a high level of costs become unprofitable and must leave this industry.
In Fig. Figure 6 shows three possible options for the company's position in the market. If the price line R only touches the average cost curve AC at the minimum point M(Fig. 6a), then we are dealing with the so-called marginal firm. At a given price level, it is able to cover only its minimum average costs, and it is indifferent to it whether it remains in this industry or not. Dot M in this case is the point of zero profit.
It should be especially emphasized that when we talk about zero profit, we do not mean that the marginal firm makes no profit at all. Production costs include not only the costs of raw materials, equipment, and labor, but also the interest that firms could receive on their capital if they invested it in other industries. In other words, normal profit as the normal return on capital, determined as a result of competition in all industries with the same level of risk, or the reward of the entrepreneurial factor, is a component of costs. Usually the factor of entrepreneurship is considered as constant. In this regard, normal profit is attributed to fixed costs.
If average costs are lower than price (Fig. 6 b), then the firm, being in a position of equilibrium, receives on average a profit higher than normal profit, i.e. receives excess profits.
Finally, if average costs for any volume of production are higher than the market price (Fig. 6 V), then this company suffers losses and will go bankrupt if it is not reorganized or leaves the market.
The dynamics of a firm's average costs characterize its position in the market, but in itself does not determine the supply line and the point of optimal production volume. Indeed, if average costs are lower than prices (Fig. 6b), then we can only say that in the range from Q 1 to Q 3 there is a zone of profitable production, and with production volume Q 2, which corresponds to the minimum average cost, the firm receives maximum profit per unit of product. However, does this mean that production volume Q 2– the optimal level of production, where the firm reaches its equilibrium? The manufacturer, as you know, is not interested in profit per unit of production, but in the maximum total amount of profit received. The average cost line does not show where this maximum is reached.
To understand whether it is profitable to produce an additional unit of output, an entrepreneur needs to compare the possible change in income with the change in gross costs.
The costs associated with producing an additional unit of output are called marginal, or marginal, costs (MC - English marginal costs). Sometimes these costs are called incremental costs, since they represent an increase in gross costs that the enterprise must undertake to produce one more unit of output. But since fixed costs do not change with a change in output per unit of output, marginal costs are determined by the increase only in variable costs as a result of the release of an additional unit of output. Marginal cost shows how much it would cost the firm to increase output by one unit.
In market conditions, marginal cost analysis plays a decisive role in developing and justifying an enterprise's pricing strategy. Knowing marginal costs helps enterprise management establish:
· increase or decrease production output;
· which supplier of raw materials should be preferred;
· within what boundaries the production process should be carried out.
To implement a thoughtful pricing policy, every entrepreneur must calculate and deeply analyze the opportunity costs of the enterprise in both the short and long term. In the short term (no more than 1 year), there are no fundamental changes in the main factors of production (technology, structure), while other factors can change in order for production output to increase. Therefore, conducting a static analysis of short-term costs is quite justified.
To illustrate the behavior of alternative indicators of an enterprise's costs in the short term, we give a conditional example. In table Table 3 presents the values of possible production volumes of goods, data on fixed, variable and gross costs, as well as average and marginal costs.
So, in the table. 3 presents various options for production from 1 unit. products up to 11 units, even the case of production stop is provided (zero position). For all production volumes, fixed costs remain unchanged. Variable costs increase as production output increases: at extreme (small and large) production volumes there are more of them, at average values there are fewer of them. Gross costs also increase with production growth, but at a slower pace, since they are reflected in the stability of fixed costs.
In Fig. Figure 7 shows a graph of the average and marginal cost curves, which reflect the cost data given in table. 3.
Rice. 7. The nature of changes in marginal and average costs in the short term
Average gross cost curve (AS) always above the average variable cost curve (AVC). Gap between curves AC And AVC shows the value of average fixed costs (AFC). Fixed costs are 50 rubles, and the average fixed cost curve (AFC) continuously decreases from 50 rub. to 0. Thus, with increasing production volume, the distance between the curves A C And A VC decreases.
Curve AC has the same shape as the curve AVC, although in Fig. 7 she just started to bend upward (since A.F.C. is decreasing for all production volumes, the curve A C always reaches its minimum value at a higher output than the curve A VC).
If the marginal cost curve MS lies below average cost, then the average cost curve AVC(And AC) goes down if MS– above average, then the curve AKS(And AC) goes up. As shown in Fig. 7, the marginal cost curve MC must intersect the average cost curves (A VC and AC) at the points of their minimum values. To the left of these intersection points, marginal cost is below average cost, so average cost falls. To the right of the intercepts, marginal cost is higher than average cost, so average cost rises. It follows from this that the intersection of the curves should occur at the lowest value of average costs.
When analyzing costs, it is important to note that changes in prices for fixed and variable factors of production, and therefore costs, shift cost curves. An increase in fixed costs causes a shift in the curve F.C. and therefore the curve shifts TS by the same amount (2see Fig. 4). However, changes in fixed costs do not lead to a shift in the marginal cost curve or the average variable cost curve (see Fig. 5), since fixed costs create only conditions for a particular business and do not have any effect on variable costs.
An increase in the price of a variable factor, for example, labor (see Fig. 4), shifts both curves TS And MS. Curve TS shifts due to the fact that variable costs increase with increasing production volume, the curve similarly increases And V.C. Marginal costs are also affected: as variable costs increase MS will be higher for each volume of output.
Thus, to summarize, it is necessary to emphasize that marginal and average costs are important concepts in a market economy; they determine the business activity of an enterprise. The analysis of short-term costs is especially relevant for firms operating in markets with noticeable fluctuations in demand caused by various reasons.
In the long term, all the factors of production used in the plans of the enterprise can change (the size of the enterprise, the volume of production capacity, the amount of capital investments attracted, etc.), and the manager, based on cost analysis, must choose a combination of production factors at which the costs of producing a certain volume of output would be minimal.
When analyzing the cost of production, all costs are usually divided into two groups: conditionally variable (depending on the volume of work) and conditionally constant (independent or slightly dependent on the volume of work). This division is purely conditional. Almost all expenses depend to one degree or another on the volume of work.
As the volume of work increases, costs increase. Conditionally variable (dependent) costs, with constant quality indicators and labor productivity, change in proportion to the volume of work.
In general, the influence of the volume of work on the cost of production is represented by the following formula:
C=[ R h(1 TO)+R nz ]/[ V(1 K)]
where R z, R nz are, respectively, dependent and independent costs of production;
K is a coefficient that takes into account changes in the volume of work (increase or decrease (in %) in the volume of production in the planned (reporting) period compared to the base);
V - volume of work, production.
This formula is correct if conditionally variable costs change in direct proportion to the volume of work, and conditionally constant (independent) costs remain at the same level. Under these conditions, by dividing costs into dependent and independent, it is possible to determine the cost of production when the volume of work changes.
If conditionally variable costs change in direct proportion to the volume of production, and conditionally constant costs remain unchanged, then the cost per unit of production in terms of conditionally variable costs remains constant when the volume of production changes, and the cost per unit of production in terms of conditionally fixed costs will either increase, or decrease depending on the decrease or increase in production volume. This statement is demonstrated by the graph of a hyperbolic curve (Fig. 8).
If we accept that:
x - volume of production;
a - part of the cost of production, conditionally depending on the volume of production;
b is a conditionally constant value independent of the volume of production costs;
C total, C 3, C nz - the total cost per unit of production, respectively, in terms of dependent expenses, in terms of independent expenses;
Rz, Rnz - respectively dependent and independent expenses (cost) for production, then
C 3 = P 3 /x = ax/x = a;
C nz = P nz /x = b/x;
C total = C 3 + C nz = a + b/x.
With an increase in production volume, the share of independent costs in the unit cost of production will decrease along a hyperbolic curve.
The effect of production volume on the actual cost per unit of production can be determined by the formula:
C f = C 3 + C nz / (1 ± K).
Using these formulas, you can solve an extremely important problem for an enterprise - to determine the volume of production required to make a profit, i.e. for the enterprise to enter the profitability zone (Fig. 9).
2. Composition of costs included in the cost of production
Cost of products (works, services) - These are the costs of an enterprise expressed in monetary terms for labor and material and technical means necessary for the production and sale of products.
The cost of production is one of the main indicators of the efficiency of economic activity of enterprises, as well as one of the fund-forming indicators used in the formation of economic incentive funds. The work of enterprises and their divisions is assessed at cost. It is widely used in analyzing the activities of enterprises, determining the economic efficiency of capital investments and new equipment, measures to improve the quality and reliability of equipment, as well as in resolving issues regarding the introduction of rationalization and inventive proposals, and the deployment of productive forces.
Reducing costs is a reserve for increasing production and increasing savings. The level of cost depends on the organization of production and labor, planning and rationing of labor, material and monetary costs per unit of production. Consequently, this indicator characterizes the degree of use of material resources and labor, fixed and working capital, and the level of economic management.
The costs that form the cost of products (works, services) are grouped in accordance with their economic content into the following elements:
–material costs (minus the cost of returnable wasteV);
–labor costs;
–deductions for insurance premiums;
–depreciation of fixed assets;
–other expenses.
Material costs include the cost of:
purchased raw materials and materials that form the basis of manufactured products;
purchased materials used to ensure a normal technological process;
purchased components and semi-finished products;
works and services of a production nature performed by third-party companies;
costs associated with the use of natural raw materials in terms of deductions for geological exploration, payment for standing timber, payment for water;
fuel of all types purchased from outside;
purchased energy of all types;
losses from shortage of materials within the limits of natural loss.
The cost of returnable waste is excluded from the cost of material resources.
The element “Labor expenses” reflects the costs of remunerating the main production personnel of the enterprise, including bonuses to workers and employees for production results, incentive and compensatory payments, as well as the cost of remuneration of non-employee employees related to the main activity.
When assigning labor costs to the cost price, it is necessary to keep in mind that the cost of production does not include some types of additional payments in cash and in kind, which are made at the expense of profits remaining at the disposal of enterprises and special sources.
In the element “Deductions for insurance premiums» deductions are reflected according to established standards for insurance premiumsfrom labor costs included in the cost of products (works, services) by elementthat “labor costs” (except for those types of payment for whichinsurance premiums are not charged).Insurance premium rates in 2012-2013 for individual entrepreneurs and taxpayers are in Table 1.
Table 1 - Insurance premium rates in 2012-2013 for individual entrepreneurs and taxpayers (http://www.moedelo.org/stavki-strahovyh-vznosov-2012)
|
Pension fund |
FFOMS (compulsory health insurance fund) |
FSS (social insurance fund) |
Total amount of contributions |
|||
|
For persons born in 1966. and older |
For persons born in 1967. and younger |
|||||
|
Fear. Part |
Fear. Part |
Accumulate Part |
||||
|
General tax regime | ||||||
|
Payers on the simplified taxation system (simplified taxation system) |
||||||
|
Payers of UTII (single tax on imputed income) |
||||||
The element “Depreciation of fixed assets” reflects the amount of depreciation charges for full restoration, calculated on the basis of the book value of fixed assets and norms approved in the established manner, including accelerated depreciation of their active part, carried out in accordance with the law. At the same time, depreciation for machinery, equipment and vehicles ceases after the expiration of their standard service life, subject to the full transfer of their entire cost to production and distribution costs.
The element “Other expenses” as part of the cost of products (works, services) includes payments for compulsory insurance of the enterprise’s property accounted for as part of production assets, remuneration for rationalization proposals, interest payments for short-term bank loans, payment for work on product certification, travel expenses according to established standards, lifting costs, payments to third-party organizations for non-production services, as well as other costs included in the cost of products (works, services), but not related to the previously listed cost elements.
Payments for compulsory property insurance, as well as expenses associated with the sale (sale) of products (works, services) when planning, accounting and calculating the cost of products (works, services), are grouped by cost items.
The list of cost items, their composition and methods of distribution by type of product (work, service) are determined in accordance with industry guidelines on planning, accounting and cost calculation, taking into account the nature and structure of production.
At the same time, the grouping of costs by item established for the relevant industry (sub-industry) should ensure the greatest allocation of costs associated with the production of certain types of products, which can be directly and directly included in their cost (so-called direct income). For example, in the mining industries, the item “Mining preparation work” is included in the costs; in the mechanical engineering industries - the article “Products, semi-finished products and services of cooperative enterprises”, etc.
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