Types of production costs. Fixed and variable production costs
The goal of any enterprise is to earn the maximum profit, which is calculated as the difference between income and total costs. Therefore, the financial result of the company directly depends on the size of its costs. This article describes the fixed, variable, and total production costs and how they affect the current and future activities of an enterprise.
What is the cost of production
Under the cost of production imply the cash costs of the purchase of all factors used to manufacture products. The most effective way of production is considered to be the one that has the minimum value of expenses for the release of a unit of goods.
The relevance of calculating this indicator is associated with the problem of limited resources and alternative use, when the raw materials and materials used can be used only for their intended purpose, and all other ways of their use are excluded.Therefore, at each enterprise, the economist must carefully calculate all types of production costs and be able to choose the optimal combination of factors used so that costs are minimal.
Explicit and implicit costs
Explicit or external costs include expenses incurred by an enterprise at the expense of suppliers of raw materials, fuel, and service counterparties.
The implicit, or internal, costs of an enterprise are the revenues lost by the firm due to the independent use of its resources. In other words, this is the amount of money that an enterprise could receive with the best method of applying the available resource base. For example, to divert a specific type of material from the production of product A and use it to manufacture products B.
This division of costs is associated with different approaches to their calculation.
Cost calculation methods
In economics, there are two approaches that are used to calculate the sum of production costs:
- Accounting - in the cost of production will include only the actual costs of the enterprise: wages, depreciation, social contributions, payment for raw materials and fuel.
- Economic - in addition to real costs, production costs include the cost of the lost opportunity for the optimal use of available resources.
Classification of production costs
There are these types of production costs:
- Fixed costs (PI) - costs, the amount of which does not change in the short term and does not depend on the volume of manufactured products. That is, with an increase or decrease in production, the value of these costs will be the same. Such expenses include the salary of the administration, rental of premises.
- Average fixed costs (IPAs) are fixed costs that fall on a unit of manufactured products. They are calculated by the formula:
- SPI = PI: Oh,
where O is the volume of production.
From this formula follows the dependence of average costs on the quantity of goods produced. If the firm will increase production volumes, then overhead costs, respectively, will decrease. This pattern serves as an incentive for expansion.
3. Variable production costs (CI) - costs that depend on production volumes and tend to change whena decrease or increase in the total quantity of manufactured goods (wages of workers, costs of resources, raw materials, electricity). This means that with increasing scale of operations, variable costs will increase. At first they will increase in proportion to the volume of production. At the next stage, the company will achieve cost savings with higher production. And in the third period, due to the need to purchase more raw materials, variable production costs may increase. Examples of such a trend are frequent transportation of finished goods to the warehouse, payment to suppliers for additional batches of raw materials.
When making calculations, it is very important to distinguish cost elements in order to calculate the correct cost of production. It should be remembered that the variable production costs do not include rent for real estate, depreciation of fixed assets, equipment maintenance.
4. The average variable costs (SPRI) - the sum of the variable costs incurred by the company for the manufacture of a commodity unit. This indicator can be calculated by dividing the total variable costs by the volume of goods produced:
- SPRI = Pr: O.
The average variable cost of production does not change with a certain range of production volumes, but with a significant increase in the quantity of manufactured goods, they begin to increase. This is associated with large total costs and their heterogeneous composition.
5. Total costs (OI) - include fixed and variable production costs. They are calculated by the formula:
- OI = PI + PIR.
That is, it is necessary to look for the reasons for the high total costs in its components.
6. The average total costs (SDI) - show the total production costs that fall on a unit of product:
- SDI = OI: O = (PI + PIR): O.
The last two indicators increase with the growth of production volumes.
Types of variable costs
Variable production costs do not always increase in proportion to the rate of increase in production. For example, the company decided to produce more goods and for this introduced the night shift. Payment for work at such a time is higher, and, as a result, the company will incur additional considerable costs.Therefore, there are several types of variable costs:
- Proportional - such costs increase at the same rate with the volume of production.For example, with a 15% increase in production, variable costs will increase by the same amount.
- Regressive - the growth rate of this type of cost lags behind the increase in the volume of goods; for example, with an increase in the number of manufactured products by 23%, variable costs will increase only by 10%.
- Progressive - variable costs of this type increase faster than the growth in production volume. For example, an enterprise increased output by 15%, while costs increased by 25%.
Costs in the short term
The short-term period is the period of time during which one group of factors of production is constant and the other is variable. In this case, the stable factors include the area of the building, the size of buildings, the number of used machinery and equipment. Variable factors consist of raw materials, the number of employees.
A long-term period is a period in which all production factors used are variable. The fact is that for a long period any firm can change the premises to more or less, completely renew the equipment, reduce or expand the number of enterprises under its control, and adjust the composition of the management staff.That is, in the long run, all costs are considered as variable production costs.
When planning a long-term business, an enterprise should conduct a deep and thorough analysis of all possible costs and make up the dynamics of future expenses in order to reach the most efficient production.
Average costs in the long run
The company can organize small, medium and large production. When choosing the scale of activity, the firm must take into account the main market indicators, the projected demand for its products and the cost of the necessary production capacities.
If the product of the company is not in great demand and it is planned to produce a small amount of it, in this case it is better to create a small production. Average costs will be significantly lower than for large-scale production. If the market assessment showed a high demand for goods, then it is more profitable for the company to organize a large production. It will be more cost-effective and will have the lowest fixed, variable and total costs.
Choosing a more profitable production option, the firm must constantly monitor all its costs,to be able to change resources in time.