How to calculate variable costs. Determination of variable and fixed costs

If an organization's variable costs per unit of output are reduced by 15%, assuming other factors remain constant, then the break-even point will be:

x - 34x = 200000

x = 3571 units of production.

A reduction in variable costs per unit of production by 15% (6 rubles) will cause a decrease in sales volume by only 10.8% (429 rubles).

In practice, it is very difficult to change this or that indicator in a favorable direction: production is planned with maximum savings, and actual costs are slightly higher than expected.

A variation of the equation method is the marginal analysis method. The main category of marginal analysis is marginal income.

Marginal income is the difference between revenue from sales of products and variable costs. Marginal income is intended to recover fixed costs and generate a profit. In other words, the profit from the sale of products in combination with fixed costs is understood as the marginal income of the organization.

The following formula is used to calculate profit:

Profit = total contribution margin - total fixed costs.

Since at the break-even point profit is zero, we get:

Marginal income per unit of product sales volume = total fixed costs.

Thus, the formula for calculating the break-even point using the contribution margin method will be as follows:

Break-even point = Total fixed costs / Contribution margin per unit.

The purpose of marginal analysis is to determine the volume of products sold at which sales revenue is equal to its full cost.

Let's calculate the break-even point in units of production based on the data given in example 1.

To calculate the break-even point, it is necessary to calculate the marginal income per unit of product, which will be equal to the difference between the organization's profit per unit of product sold and variable costs per unit of product. We get:

Break-even point = 200,000: (90-40) = 4,000 units of production.

Using marginal analysis, it is possible to establish not only the break-even point of production volume, but also the critical level of the amount of fixed costs, as well as prices at a given value of other factors.

The critical level of fixed costs at a given level of marginal income and sales volume is calculated as follows:

PZkr = Vn (C - PR) = Vn

Md,(9)

Where C

— unit price of products sold;

ETC— variable costs per unit of production;

PZkr— critical level of fixed costs;

— quantity of products sold in natural units;

Md— marginal income per unit of production.

The point of this calculation is to determine the maximum allowable amount of fixed costs, which is covered by marginal income for a given volume of production, price and level of variable costs per unit of production. If fixed costs exceed this level, the company will be unprofitable.

In addition to the indicators discussed above, it is necessary to calculate such an indicator as the marginal safety margin indicator (financial stability margin).

Marginal safety margin is a value showing the excess of actual revenue from product sales over its threshold (critical) value:

MZP = Vf - Vkr

Where minimum wage

— marginal safety margin;

Vf— actual volume of revenue;

— critical (threshold) revenue volume.

in percentage terms:

MZP = (Vf - Vkr) / Vf

100% ,(11)

The marginal margin of safety shows by what percentage the actual production volume is higher than the critical (threshold) one, that is, how much the organization can reduce the sales volume without threatening the financial position. The higher the marginal safety margin, the better for the enterprise.

Let's build a general graph of the relationship between costs, production volume and profit, on which we will also depict marginal income and marginal safety margin.

Fig.7.1. The relationship between costs, production volume and profit.

On the graph, the difference between sales revenue and variable costs is marginal income, the value of which also shows the sum of fixed costs and profit from sales. The line segment from the critical revenue volume (Vkr) to the actual volume (Vf) represents the marginal safety margin.

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The production costs of a business can be divided into two categories: variable and fixed costs. Variable costs depend on changes in production volume, while constant costs remain fixed. Understanding the principle of classifying costs into fixed and variable is the first step to managing costs and improving production efficiency.

Methods for determining the break-even point

Knowing how to calculate variable costs will help you reduce your unit costs, making your business more profitable.

Steps

1 Calculation of variable costs

1 Classify costs into fixed and variable. Fixed costs are those costs that remain unchanged when production volume changes. For example, this may include rent and salaries of management personnel. Whether you produce 1 unit or 10,000 units in a month, these costs will remain approximately the same. Variable costs change with changes in production volume. For example, these include the costs of raw materials, packaging materials, product delivery costs and wages of production workers. The more products you produce, the higher your variable costs will be.
Now that you understand the difference between fixed and variable costs, try classifying all the costs of your business. Many of them will be easy to classify into one category or another, while others will not be so clear cut.
Some (combined) costs that do not behave strictly as fixed or variable are difficult to classify. For example, employee salaries may consist of a fixed salary and a percentage of commissions on sales volume. Such costs are best broken down into fixed and variable components. In this case, commissions from sales volume will be classified as variable costs.
2 Add together all the variable costs for the time period under consideration. Having identified all variable costs, calculate their total value for the analyzed period of time. For example, your manufacturing operations are fairly simple and involve only three types of variable costs: raw materials, packaging and shipping costs, and worker wages. The sum of all these costs will be the total variable costs.
Let’s assume that all your variable costs for the year in monetary terms will be as follows: 350,000 rubles for raw materials and supplies, 200,000 rubles for packaging and delivery costs, 1,000,000 rubles for workers’ wages.
Total variable costs for the year in rubles will be:

2 Application of the minimax calculation method

1 Identify combined costs. Sometimes some costs cannot be clearly classified as variable or fixed costs. Such costs may vary depending on the volume of production, but may also be present when production is at a standstill or there are no sales. Such costs are called combined costs. They can be broken down into fixed and variable components to more accurately determine the amount of fixed and variable costs.
An example of a combined cost is employee wages, which consists of salary and a commission percentage of sales. The employee receives a salary even in the absence of sales, but his commission depends on the volume of product sales. In this case, salary is a fixed cost, and commissions are a variable cost.
Combined costs can also occur in the wages of piece workers if you guarantee that they will be paid a fixed amount of hours worked each pay period. The fixed volume of employment will be classified as fixed costs, and all additional working time will be classified as variable costs.
In addition, bonuses paid to employees can also be classified as combined costs.
A more complex example of combined costs would be utility bills. You will have to pay for electricity, water and gas even when there is no production. However, for the most part, these costs will depend on the volume of production. To break them down into constant and variable components, a slightly more complex calculation method is required.
2 Estimate costs according to the level of production activity. To break down combined costs into fixed and variable components, you can use the minimax method. This method estimates the combined costs of the months with the highest and lowest production volumes and then compares them to identify the variable cost component. To begin the calculation, you must first identify the months with the highest and lowest volume of manufacturing activity (output). For each month in question, record production activity in some measurable quantity (for example, machine hours expended) and the associated combined cost amount.
Let's say that your company uses a waterjet cutting machine in production to cut metal parts. For this reason, your company has variable water costs for production, which depend on its volume. However, you also have constant water costs associated with maintaining your business (for drinking, utilities, and so on). In general, the costs for water in your company are combined.
Let's say that in the month with the highest volume of production, your water bill was 9,000 rubles, and at the same time you spent 60,000 machine hours on production. And in the month with the lowest production volume, the water bill was 8,000 rubles, while 50,000 machine hours were spent.
3 Calculate the variable cost per unit of production (VCR). Find the difference between the two values of both indicators (costs and production) and determine the value of variable costs per unit of production. It is calculated as follows:
4 Determine the total variable costs. The value calculated above can be used to determine the variable part of the combined costs. Multiply the variable costs per unit of production by the appropriate level of production activity. In the example under consideration, the calculation will be as follows:

3 Using variable cost information in practice

1 Assess trends in variable costs. In most cases, increasing production volume will make each additional unit produced more profitable. This is because fixed costs are spread over more units of output. For example, if a business that produced 500,000 units of product spent 50,000 rubles on rent, these costs in the cost of each unit of production amounted to 0.10 rubles. If the production volume doubles, then the rental costs per unit of production will already be 0.05 rubles, which will allow you to get more profit from the sale of each unit of goods. That is, as sales revenue increases, the cost of production also increases, but at a slower pace (ideally, in the unit cost of production, the variable costs per unit should remain unchanged, and the component of the fixed costs per unit should fall).
To understand whether the level of variable costs per unit remains constant, divide total variable costs by revenue. This way you can understand what percentage of your variable costs are in revenue. If you conduct a dynamic analysis of this value by period, you can understand whether the variable costs per unit of production are changing in one direction or another.
For example, if total variable costs for one year amounted to 70,000 rubles and for the next - 80,000 rubles, while revenue was received in the amount of 1,000,000 and 1,150,000 rubles, respectively, you can verify that the variable costs per unit of production are have been quite stable over the years:
However, for companies with a higher share of fixed costs, it is much easier to take advantage of economies of scale (increased production leads to lower unit costs). This is due to the fact that revenue from increased production grows faster than production costs.
For example, a software company has significant fixed costs associated with software development and staff costs, but is able to increase sales without a significant increase in variable costs.
On the other hand, if sales decline, a company with a high share of variable costs will find it easier to cut production and remain profitable than a company with a high share of fixed costs (it will have to find a way out and decide what to do with high fixed costs per unit of output). .
A company with high fixed costs and low variable costs has high operating leverage, which makes its profit or loss highly dependent on revenue volume. Essentially, sales above a certain level are noticeably more profitable, and sales below it are noticeably more costly.
Ideally, a company should find a balance between risk and profitability by adjusting the level of fixed and variable costs.
3 Conduct a comparative analysis with companies in the same industry. First, calculate your company's variable costs per unit. Then collect data on the value of this indicator from companies in the same industry. This will give you a starting point for assessing your company's performance. Higher variable costs per unit may indicate that a company is less efficient than others; whereas a lower value of this indicator can be considered a competitive advantage.
The value of variable costs per unit of output above the industry average indicates that the company spends more money and resources (labor, materials, utilities) on production than its competitors. This may indicate its low efficiency or the use of too expensive resources in production. In any case, it will not be as profitable as its competitors unless it cuts its costs or increases its prices.
On the other hand, a company that is able to produce the same goods at a lower cost realizes a competitive advantage in earning a greater profit from the set market price.
This competitive advantage may be based on the use of cheaper materials, cheaper labor or more efficient production facilities.
For example, a company that purchases cotton at a lower price than other competitors can produce shirts with lower variable costs and charge lower prices for the products.
Public companies publish their reports on their websites, as well as on the websites of the exchanges on which their securities are traded. Information about their variable costs can be obtained by analyzing the "Income Statements" of these companies.
4 Conduct a break-even analysis. Variable costs (if known) combined with fixed costs can be used to calculate the break-even point for a new manufacturing project. The analyst is able to draw a graph of the dependence of fixed and variable costs on production volumes. With its help, he will be able to determine the most profitable level of production.
For example, if a company plans to start producing a new product, which requires a one-time investment of 100,000 rubles, you will want to know how much product will need to be produced and sold in order to recoup this investment and start making a profit. To do this, it will be necessary to add the sum of investments and other fixed costs with variable costs and subtract the total from revenue at various levels of production.
Mathematically, the break-even point can be calculated using the following formula:
For example, if additional fixed costs during production are 50,000 rubles (on top of the original 100,000 rubles, giving a total of 150,000 rubles in fixed costs), variable costs will be equal to 1 ruble per unit of production, and the selling price will be set at 4 rubles, then the break-even point will be calculated as follows: which will result in 50,000 units of production.

Please note that the calculations given in the examples also apply to calculations in other types of currencies.

Sent by: Nikitina Alla. 2017-11-11 18:26:20

Return to Product Costs

Variable and fixed costs are the two main types of costs. Each of them is determined depending on whether the resulting costs change in response to fluctuations in the selected cost type.

Variable costs are costs whose size changes in proportion to changes in the volume of production. Variable costs include: raw materials and materials, wages of production workers, purchased products and semi-finished products, fuel and electricity for production needs, etc.

In addition to direct production costs, some types of indirect costs are considered variable, such as: costs of tools, auxiliary materials, etc. Per unit of production, variable costs remain constant, despite changes in production volume.

Example: With a production volume of 1000 rubles. with a cost per unit of production of 10 rubles, variable costs amounted to 300 rubles, that is, based on the cost of a unit of production they amounted to 6 rubles. (300 rub. / 100 pcs. = 3 rub.).

As a result of doubling production volume, variable costs increased to 600 rubles, but calculated on the cost of a unit of production they still amount to 6 rubles. (600 rub. / 200 pcs. = 3 rub.).

Fixed costs are costs whose value is almost independent of changes in the volume of production. Fixed costs include: salaries of management personnel, communication services, depreciation of fixed assets, rental payments, etc.

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Per unit of output, fixed costs change in parallel with changes in production volume.

Example: With a production volume of 1000 rubles. with a cost per unit of production of 10 rubles, fixed costs amounted to 200 rubles, that is, based on the cost of a unit of production they amounted to 2 rubles. (200 rub. / 100 pcs. = 2 rub.).

As a result of doubling production volume, fixed costs remained at the same level, but based on the cost of a unit of production they now amount to 1 rub. (2000 rub. / 200 pcs. = 1 rub.).

At the same time, while remaining independent of changes in production volume, fixed costs can change under the influence of other (often external) factors, such as rising prices, etc.

However, such changes usually do not have a noticeable impact on the amount of general business expenses, therefore, when planning, accounting and control, general business expenses are taken as constant.

It should also be noted that some of the general expenses may still vary depending on the volume of production.

Thus, as a result of an increase in production volume, the salaries of managers and their technical equipment (corporate communications, transport, etc.) may increase.

Total and average costs

Definition

Analysis of the behavior of total and average costs is one of the key stages of production planning and making appropriate management decisions. Control over them is important not only from the point of view of controlling profitability, but also for forming a pricing policy.

Average Variable Costs

Average variable costs ( English Average Variable Cost, AVC) or variable costs per unit of production are calculated as the ratio of total variable costs to the volume of production.

Formula

where TVC is total variable costs, Q is the volume of production.

Behavior

The behavior of average variable costs depends on various factors, so it is advisable to consider it with an example.

The table presents data on the costs of Integral LLC.

Typically, as production volume increases, average variable costs gradually decrease, reach a minimum, and then begin to gradually increase, as shown in the graph below.

The U-shape of the curve is explained by the principle of variable proportions.

While the enterprise increases production volume and approaches full capacity utilization, average variable costs decrease as the efficiency of use of production equipment increases.
When full load is achieved, costs reach their minimum.
When design capacity is exceeded, the efficiency of production equipment decreases due to increased wear, which leads to an increase in average variable costs.

Average fixed costs

Average fixed costs ( English Average Fixed Cost, AFC) are essentially fixed costs per unit of production.

Formula

where TFC is the total fixed costs, Q is the volume of production.

Behavior

Average fixed costs vary inversely with the volume of production.

What is the break-even point and how to calculate it

With an increase in production volume they decrease, and with a decrease, on the contrary, they increase. Let's assume that the total fixed costs of the enterprise are 750,000. per quarter. With a quarterly production volume of 150 units. products, fixed costs per unit of production will be 5,000 USD, and with a volume of 250 units. already 3,000 USD This relationship is graphically demonstrated in the diagram.

As the volume of production increases, average fixed costs gradually decrease, but they never become equal to 0.

Average total costs

Average total costs ( English Average Total Cost, ATC) or cost per unit of production is one of the key indicators of how effectively a business is using its limited resources.

Formula

where TC is the total costs, Q is the volume of production.

An alternative calculation formula is as follows.

Behavior

The behavior of average total costs varies depending on the portion of the U-shaped curve, as demonstrated in the graph below.

Until full capacity utilization is achieved, average total costs decrease because both average fixed and average variable costs decrease in this area.

When capacity is loaded above full capacity, it can either increase or decrease. It depends on whether average variable costs will increase faster than average fixed costs decrease or not. For this reason, the point of full capacity utilization is not always the minimum of average total costs.

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Variable Cost Examples

Conditionally fixed and conditionally variable costs

In general, all types of costs can be divided into two main categories: fixed (conditionally fixed) and variable (conditionally variable). According to the legislation of the Russian Federation, the concept of fixed and variable costs is present in paragraph 1 of Article 318 of the Tax Code of the Russian Federation.

Conditionally fixed costs(English) total fixed costs) - an element of the break-even point model, representing costs that do not depend on the volume of output, contrasted with variable costs, which add up to total costs.

In simple terms, these are expenses that remain relatively unchanged during the budget period, regardless of changes in sales volumes. Examples are: administrative expenses, expenses for rent and maintenance of buildings, depreciation of fixed assets, expenses for their repairs, time wages, on-farm deductions, etc. In reality, these expenses are not constant in the literal sense of the word. They increase with the increase in the scale of economic activity (for example, with the advent of new products, businesses, branches) at a slower pace than the growth of sales volumes, or they grow spasmodically. That's why they are called conditionally constant.

This type of cost largely overlaps with overhead, or indirect costs that accompany the main production, but are not directly related to it.

Detailed examples of semi-fixed costs:

Interest for obligations during the normal operation of the enterprise and maintaining the volume of borrowed funds, a certain amount must be paid for their use, regardless of the volume of production, however, if the volume of production is so low that the enterprise is preparing for bankruptcy , these costs can be neglected and interest payments can be stopped
Enterprise property taxes , since its value is quite stable, are also mainly fixed expenses, however, you can sell property to another company and rent it from it (form leasing ), thereby reducing property tax payments
Depreciation deductions using the linear method of accrual (evenly for the entire period of use of the property) in accordance with the selected accounting policy, which, however, can be changed
Payment security, watchmen , despite the fact that it can be reduced by reducing the number of workers and reducing the load on checkpoints , remains even if the enterprise is idle, if it wants to preserve its property
Payment rental depending on the type of production, duration of the contract and the possibility of concluding a sublease agreement, it can act as a variable cost
Salary management personnel under conditions of normal functioning of the enterprise is independent of production volumes, however, with the accompanying restructuring of the enterprise layoffs ineffective managers can also be reduced.

Variable (conditionally variable) costs(English) variable costs) are expenses that change in direct proportion in accordance with the increase or decrease in total turnover (sales revenue). These costs are associated with a business's operations to purchase and deliver products to consumers.

This includes: the cost of purchased goods, raw materials, components, some processing costs (for example, electricity), transportation costs, piecework wages, interest on loans and borrowings, etc. They are called conditional variables because they are directly proportional to sales volume actually exists only during a certain period. The share of these costs may change over a certain period (suppliers will raise prices, the rate of inflation of selling prices may not coincide with the rate of inflation of these costs, etc.).

The main sign by which you can determine whether costs are variable is their disappearance when production stops.

Variable Cost Examples

In accordance with IFRS standards, there are two groups of variable costs: production variable direct costs and production variable indirect costs.

Manufacturing variable direct costs- these are expenses that can be attributed directly to the cost of specific products based on primary accounting data.

Manufacturing Variable Indirect Costs- these are expenses that are directly dependent or almost directly dependent on changes in the volume of activity, however, due to the technological features of production, they cannot or are not economically feasible to be directly attributed to the manufactured products.

Examples direct variables costs are:

Costs of raw materials and basic materials;
Energy costs, fuel;
Wages of workers producing products, with accruals for it.

Examples indirect variables costs are the costs of raw materials in complex production. For example, when processing raw materials - coal - coke, gas, benzene, coal tar, and ammonia are produced. When milk is separated, skim milk and cream are obtained. It is possible to divide the costs of raw materials by type of product in these examples only indirectly.

Break even (BEP — break-even point) - the minimum volume of production and sales of products at which costs will be offset by income, and with the production and sale of each subsequent unit of product the enterprise begins to make a profit. The break-even point can be determined in units of production, in monetary terms, or taking into account the expected profit margin.

Break-even point in monetary terms- such a minimum amount of income at which all costs are fully recouped (profit is equal to zero).

BEP =* Revenue from sales

Or, which is the same thing BEP = = *P (see below for explanation of meanings)

Revenue and costs must relate to the same period of time (month, quarter, six months, year). The break-even point will characterize the minimum acceptable sales volume for the same period.

Let's look at the example of a company. Cost analysis will help you clearly determine BEP:

Break-even sales volume - 800/(2600-1560)*2600 = 2000 rubles. per month. Actual sales volume is 2600 rubles/month. exceeds the break-even point, this is a good result for this company.

The break-even point is almost the only indicator about which we can say: “The lower, the better. The less you need to sell to start making a profit, the less likely it is to go bankrupt.

Break-even point in units of production- such a minimum quantity of products at which the income from the sale of these products completely covers all the costs of its production.

Those. It is important to know not only the minimum allowable revenue from sales as a whole, but also the necessary contribution that each product should bring to the total profit - that is, the minimum required number of sales of each type of product. To do this, the break-even point is calculated in physical terms:

VER =or VER = =

The formula works flawlessly if the enterprise produces only one type of product. In reality, such enterprises are rare. For companies with a large range of production, the problem arises of allocating the total amount of fixed costs to individual types of products.

Fig.1. Classic CVP analysis of the behavior of costs, profits and sales volume

Additionally:

BEP (break-even point) - break even,

TFC (total fixed costs) - the value of fixed costs,

V.C.(unit variable cost) - the value of variable costs per unit of production,

P (unit sale price) - cost of a unit of production (sales),

C(unit contribution margin) - profit per unit of production without taking into account the share of fixed costs (the difference between the cost of production (P) and variable costs per unit of production (VC)).

C.V.P.-analysis (from the English costs, volume, profit - expenses, volume, profit) - analysis according to the “costs-volume-profit” scheme, an element of managing the financial result through the break-even point.

Overhead- costs of conducting business activities that cannot be directly correlated with the production of a specific product and therefore are distributed in a certain way among the costs of all produced goods

Indirect costs- costs that, unlike direct ones, cannot be directly attributed to the manufacture of products. These include, for example, administrative and management costs, costs for staff development, costs in production infrastructure, costs in the social sphere; they are distributed among various products in proportion to a justified base: the wages of production workers, the cost of materials consumed, the volume of work performed.

Depreciation deductions- an objective economic process of transferring the value of fixed assets as they wear out to the product or services produced with their help.

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Steps

Calculation of variable costs

Classify costs into fixed and variable. Fixed costs are those costs that remain unchanged when production volume changes. For example, this may include rent and salaries of management personnel. Whether you produce 1 unit or 10,000 units in a month, these costs will remain approximately the same. Variable costs change with changes in production volume. For example, these include the costs of raw materials, packaging materials, product delivery costs and wages of production workers. The more products you produce, the higher your variable costs will be.

Add together all the variable costs for the time period under consideration. Having identified all variable costs, calculate their total value for the analyzed period of time. For example, your manufacturing operations are fairly simple and involve only three types of variable costs: raw materials, packaging and shipping costs, and worker wages. The sum of all these costs will be the total variable costs.

Let’s assume that all your variable costs for the year in monetary terms will be as follows: 350,000 rubles for raw materials and supplies, 200,000 rubles for packaging and delivery costs, 1,000,000 rubles for workers’ wages.
Total variable costs for the year in rubles will be: 350000 + 200000 + 1000000 (\displaystyle 350000+200000+1000000), or 1550000 (\displaystyle 1550000) rubles These costs directly depend on the volume of production for the year.

Divide total variable costs by production volume. If you divide the total amount of variable costs by the volume of production over the analyzed period of time, you will find out the amount of variable costs per unit of production. The calculation can be represented as follows: v = V Q (\displaystyle v=(\frac (V)(Q))), where v is the variable cost per unit of output, V is the total variable cost, and Q is the volume of production. For example, if in the above example the annual production volume is 500,000 units, then the variable cost per unit would be: 1550000 500000 (\displaystyle (\frac (1550000)(500000))), or 3, 10 (\displaystyle 3,10) ruble

Using variable cost information in practice
1. Assess trends in variable costs. In most cases, increasing production volume will make each additional unit produced more profitable. This is because fixed costs are spread over more units of output. For example, if a business that produced 500,000 units of product spent 50,000 rubles on rent, these costs in the cost of each unit of production amounted to 0.10 rubles. If the production volume doubles, then the rental costs per unit of production will already be 0.05 rubles, which will allow you to get more profit from the sale of each unit of goods. That is, as sales revenue increases, the cost of production also increases, but at a slower pace (ideally, in the unit cost of production, the variable costs per unit should remain unchanged, and the component of the fixed costs per unit should fall).
  
  Use the percentage of variable costs in the cost price to assess risk. If you calculate the percentage of variable costs in the unit cost of production, you can determine the proportional ratio of variable and fixed costs. The calculation is made by dividing the variable costs per unit of production by the cost per unit of production using the formula: v v + f (\displaystyle (\frac (v)(v+f))), where v and f are respectively variable and fixed costs per unit of production. For example, if fixed costs per unit of production are 0.10 rubles, and variable costs are 0.40 rubles (with a total cost of 0.50 rubles), then 80% of the cost is variable costs ( 0.40 / 0.50 = 0.8 (\displaystyle 0.40/0.50=0.8)). As an outside investor in a company, you can use this information to assess the potential risk to the company's profitability.
  
  Conduct a comparative analysis with companies in the same industry. First, calculate your company's variable costs per unit. Then collect data on the value of this indicator from companies in the same industry. This will give you a starting point for assessing your company's performance. Higher variable costs per unit may indicate that a company is less efficient than others; whereas a lower value of this indicator can be considered a competitive advantage.
  - The value of variable costs per unit of output above the industry average indicates that the company spends more money and resources (labor, materials, utilities) on production than its competitors. This may indicate its low efficiency or the use of too expensive resources in production. In any case, it will not be as profitable as its competitors unless it cuts its costs or increases its prices.
  - On the other hand, a company that is able to produce the same goods at a lower cost realizes a competitive advantage in earning a greater profit from the set market price.
  - This competitive advantage may be based on the use of cheaper materials, cheaper labor or more efficient production facilities.
  - For example, a company that purchases cotton at a lower price than other competitors can produce shirts with lower variable costs and charge lower prices for the products.
  - Public companies publish their reports on their websites, as well as on the websites of the exchanges on which their securities are traded. Information about their variable costs can be obtained by analyzing the "Income Statements" of these companies.
2. Conduct a break-even analysis. Variable costs (if known) combined with fixed costs can be used to calculate the break-even point for a new manufacturing project. The analyst is able to draw a graph of the dependence of fixed and variable costs on production volumes. With its help, he will be able to determine the most profitable level of production.

The organization produces finished products. In tax accounting policy, we need to establish a list of direct expenses. What wages should be included in direct expenses?

When compiling a list of direct expenses for profit tax purposes, it is recommended to adhere to the list of expenses that form the production cost of finished products in accounting. It should be taken into account that the concepts of “direct costs” in accounting and “direct costs” in tax accounting are different.

Direct costs in accounting (a narrower concept) are costs that can be directly attributed to the production of a specific type of product. Costs that are included in the production cost of finished products by distribution (for example, shop costs) in accounting are called overhead costs. However, for income tax purposes these are direct expenses.

In tax accounting, direct expenses include those that are recognized in the income tax base in the reporting (tax) period in which finished products are sold. Essentially, direct costs are the production cost of a product.

In accounting, direct costs are taken into account in the debit of account 20: Debit 20 Credit 10, 70, 69. Analytical accounting in account 20 is organized for each type (by name, grade, article) of manufactured products. As a rule, the costs of raw materials, basic and auxiliary materials, basic and additional wages of production workers and social contributions for these wages can be directly attributed to a specific type of product.

The article “Basic wages of production workers” takes into account the basic wages of both production workers and engineering and technical workers directly related to the manufacture (production) of products.

The basic wages of production workers include: payment for operations and work according to piece rates and rates, as well as time-based wages; additional payments for piece-rate and time-based bonus payment systems, regional coefficients, etc.; surcharges to the basic piece rates due to deviations from normal production conditions (non-conformity of equipment, materials, tools and other deviations from technology).

The basic wages of production workers are directly included in the cost of the corresponding types of products (groups of homogeneous types of products).

That part of the basic wages of production workers, the direct attribution of which to the cost of certain types of products is difficult, is recommended to be included in it on the basis of calculation (based on the volume of production, the list of jobs and service standards) of the estimated rate of these costs per unit of production (product, order, vehicle kit, etc.).

The actual wages of these workers are included in the cost of individual types of products, commodity output and work in progress in proportion to estimated rates. These rates must be reviewed periodically as production volumes, technology, tariff rates, etc. change.

The article “Additional wages of production workers” takes into account payments provided for by labor legislation or collective agreements for time not worked at production (non-appearance): payment for regular and additional vacations, compensation for unused vacation, payment for preferential hours for teenagers, payment for breaks in work for nursing mothers mothers, payment for time associated with the performance of state and public duties, payment of remuneration for long service, etc.

The wages of general shop personnel (shop manager, repair crew, production premises cleaners, etc.) are debited to balance sheet account 25, which at the end of the month is distributed by type of product: Debit 20 Credit 25. Accordingly, for tax accounting purposes it is also included in direct costs.

Salaries of management personnel are written off as a debit to balance sheet account 26. Depending on the provisions of the accounting policy, management expenses may be included in the production cost of finished products (Debit 20 Credit 26) or written off completely to the cost of sales of the reporting period (Debit 90.2 Credit 26).

In the first option, the salary of management personnel, from the point of view of tax accounting, relates to direct expenses, in the second option - to indirect expenses.

To determine the total costs of producing different volumes of output and the costs per unit of output, it is necessary to combine production data included in the law of diminishing returns with information on input prices. As already noted, over a short period of time, some resources associated with the technical equipment of the enterprise remain unchanged. The number of other resources may vary. It follows that in the short term, various types of costs can be classified as either fixed or variable.

Fixed costs. Fixed costs are those costs whose value does not change depending on changes in production volume. Fixed costs are associated with the very existence of a company's production equipment and must be paid even if the company does not produce anything. Fixed costs, as a rule, include payment of obligations on bond loans, bank loans, rent payments, security of the enterprise, payment of utilities (telephone, lighting, sewerage), as well as time-based salaries of employees of the enterprise.

Variable costs. Variables are those costs whose value changes depending on changes in production volume. These include the costs of raw materials, fuel, energy, transport services, most labor resources, etc. The amount of variable costs varies depending on production volumes.

General costs is the sum of fixed and variable costs for each given volume of production.

We show total, fixed and variable costs on the graph (see Fig. 1).

At zero production volume, total costs are 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.

The sum of variable costs changes from the origin, and the sum of fixed costs is added each time to the vertical dimension of the sum of variable costs to obtain the total cost curve.

The distinction between fixed and variable costs is significant. Variable costs are costs that can be quickly controlled; their value can be changed over a short period of time by changing production volume. 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 volumes.

Return to Product Costs

Variable and fixed costs are the two main types of costs. Each of them is determined depending on whether the resulting costs change in response to fluctuations in the selected cost type.

As a result of doubling production volume, variable costs increased to 600 rubles, but calculated on the cost of a unit of production they still amount to 6 rubles. (600 rub. / 200 pcs. = 3 rub.).

As a result of doubling production volume, fixed costs remained at the same level, but based on the cost of a unit of production they now amount to 1 rub. (2000 rub. / 200 pcs. = 1 rub.).

At the same time, while remaining independent of changes in production volume, fixed costs can change under the influence of other (often external) factors, such as rising prices, etc.

It should also be noted that some of the general expenses may still vary depending on the volume of production.

Thus, as a result of an increase in production volume, the salaries of managers and their technical equipment (corporate communications, transport, etc.) may increase.

Firm costs
Enterprise costs
Production costs
Production costs
Production and distribution costs

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All topics:Microeconomics

In practice, the concept of production costs is usually used. This is due to the difference between the economic and accounting meaning of costs. Indeed, for an accountant, costs represent actual amounts of money spent, costs supported by documents, i.e. expenses.

Costs as an economic term include both the actual amount of money spent and lost profits. By investing money in any investment project, the investor is deprived of the right to use it in another way, for example, to invest it in a bank and receive a small, but stable and guaranteed interest, unless, of course, the bank goes bankrupt.

The best use of available resources is called opportunity cost or opportunity cost in economic theory. It is this concept that distinguishes the term “costs” from the term “costs”. In other words, costs are costs reduced by the amount of opportunity cost. Now it becomes obvious why in modern practice it is costs that form the cost and are used to determine taxation. After all, opportunity cost is a rather subjective category and cannot reduce taxable profit. Therefore, the accountant deals specifically with costs.

However, for economic analysis, opportunity costs are of fundamental importance. It is necessary to determine the lost profit, and “is the game worth the candle?” It is precisely based on the concept of opportunity costs that a person who is able to create his own business and work “for himself” may prefer a less complex and stressful type of activity. It is based on the concept of opportunity cost that one can make a conclusion about the feasibility or inexpediency of making certain decisions. It is no coincidence that when determining the manufacturer, contractor and subcontractor, a decision is often made to announce an open competition, and when assessing investment projects in conditions where there are several projects, and some of them need to be postponed for a certain time, the lost profit coefficient is calculated.

Fixed and variable costs

All costs, minus alternative ones, are classified according to the criterion of dependence or independence on production volume.

Fixed costs are costs that do not depend on the volume of products produced. They are designated FC.

Fixed costs include expenses for paying technical personnel, security of premises, advertising of products, heating, etc. Fixed costs also include depreciation charges (for the restoration of fixed capital). To define the concept of depreciation, it is necessary to classify the assets of an enterprise into fixed and working capital.

Fixed capital is capital that transfers its value to finished products in parts (the cost of a product includes only a small part of the cost of the equipment with which the production of this product is carried out), and the value expression of the means of labor is called fixed production assets. The concept of fixed assets is broader, since they also include non-productive assets that may be on the balance sheet of an enterprise, but their value is gradually lost (for example, a stadium).

Capital that transfers its value to the finished product during one turnover and is spent on the purchase of raw materials for each production cycle is called circulating capital. Depreciation is the process of transferring the value of fixed assets to finished products in parts. In other words, equipment sooner or later wears out or becomes obsolete. Accordingly, it loses its usefulness. This also happens due to natural reasons (use, temperature fluctuations, structural wear, etc.).

Depreciation deductions are made monthly based on legally established depreciation rates and the book value of fixed assets. Depreciation rate is the ratio of the amount of annual depreciation charges to the cost of fixed assets, expressed as a percentage. The state establishes different depreciation rates for individual groups of fixed production assets.

The following methods of calculating depreciation are distinguished:

Linear (equal deductions over the entire service life of the depreciable property);

Declining balance method (depreciation is accrued on the entire amount only in the first year of equipment service, then accrual is made only on the non-transferred (remaining) part of the cost);

Cumulative, by the sum of the numbers of years of useful use (a cumulative number is determined representing the sum of the numbers of years of useful use of the equipment, for example, if the equipment is depreciated over 6 years, then the cumulative number will be 6+5+4+3+2+1=21; then the price of the equipment is multiplied by the number of years of useful use and the resulting product is divided by the cumulative number; in our example, for the first year, depreciation charges for the cost of equipment of 100,000 rubles will be calculated as 100,000x6/21, depreciation charges for the third year will be 100,000x4/21);

Proportional, in proportion to production output (depreciation per unit of production is determined, which is then multiplied by the volume of production).

In the context of the rapid development of new technologies, the state can use accelerated depreciation, which allows for more frequent replacement of equipment at enterprises. In addition, accelerated depreciation can be carried out as part of state support for small businesses (depreciation deductions are not subject to income tax).

Variable costs are costs that directly depend on the volume of production. They are designated VC. Variable costs include the cost of raw materials and materials, piecework wages of workers (it is calculated based on the volume of products produced by the employee), part of the cost of electricity (since electricity consumption depends on the intensity of equipment operation) and other costs depending on the volume of output.

The sum of fixed and variable costs represents gross costs. Sometimes they are called complete or general. They are designated TS. It is not difficult to imagine their dynamics. It is enough to raise the variable cost curve by the amount of fixed costs, as shown in Fig. 1.

Rice. 1. Production costs.

The ordinate axis shows fixed, variable and gross costs, and the abscissa axis shows the volume of output.

When analyzing gross costs, it is necessary to pay special attention to their structure and its changes. Comparing gross costs with gross income is called gross performance analysis. However, for a more detailed analysis it is necessary to determine the relationship between costs and volume of output. To do this, the concept of average costs is introduced.

Average costs and their dynamics

Average costs are the costs of producing and selling a unit of output.

Average total costs (average gross costs, sometimes called simply average costs) are determined by dividing total costs by the number of products produced. They are designated ATS or simply AC.

Average variable costs are determined by dividing variable costs by the quantity produced.

They are designated AVC.

Average fixed costs are determined by dividing fixed costs by the number of products produced.

They are designated AFC.

It is quite natural that average total costs are the sum of average variable and average fixed costs.

Initially, average costs are high because starting a new production requires certain fixed costs, which are high per unit of output at the initial stage.

Gradually average costs decrease. This happens due to the increase in production output. Accordingly, as production volume increases, there are fewer and fewer fixed costs per unit of output. In addition, the growth of production allows us to purchase the necessary materials and tools in large quantities, and this, as we know, is much cheaper.

However, after some time, variable costs begin to increase. This is due to the diminishing marginal productivity of factors of production. An increase in variable costs causes the beginning of an increase in average costs.

However, minimum average costs do not mean maximum profits.

At the same time, analysis of the dynamics of average costs is of fundamental importance. It allows:

Determine the production volume corresponding to the minimum cost per unit of production;

Compare the cost per unit of output with the price per unit of output on the consumer market.

In Fig. Figure 2 shows a version of the so-called marginal firm: the price line touches the average cost curve at point B.

Rice. 2. Zero profit point (B).

The point where the price line touches the average cost curve is usually called the zero profit point. The company is able to cover the minimum costs per unit of production, but the opportunities for development of the enterprise are extremely limited. From the point of view of economic theory, a firm does not care whether it stays in a given industry or leaves it. This is due to the fact that at this point the owner of the enterprise receives normal compensation for the use of his own resources. From the point of view of economic theory, normal profit, considered as the return on capital at its best alternative use, is part of the cost. Therefore, the average cost curve also includes opportunity costs (it is not difficult to guess that in conditions of pure competition in the long term, entrepreneurs receive only the so-called normal profit, and there is no economic profit). The analysis of average costs must be complemented by the study of marginal costs.

Concept of marginal cost and marginal revenue

Average costs characterize the costs per unit of production, gross costs characterize costs as a whole, and marginal costs make it possible to study the dynamics of gross costs, try to anticipate negative trends in the future and ultimately draw a conclusion about the most optimal version of the production program.

Marginal cost is the additional cost incurred by producing an additional unit of output.

In other words, marginal cost represents the increase in total cost for each unit increase in production. Mathematically, we can define marginal cost as follows:

MC = ΔTC/ΔQ.

Marginal cost shows whether producing an additional unit of output makes a profit or not. Let's consider the dynamics of marginal costs.

Initially, marginal costs decrease while remaining below average costs. This is due to lower unit costs due to positive economies of scale. Then, like average costs, marginal costs begin to rise.

Obviously, the production of an additional unit of output also increases total income. To determine the increase in income due to an increase in production, the concept of marginal income or marginal revenue is used.

Marginal revenue (MR) is the additional income obtained by increasing production by one unit:

MR = ΔR / ΔQ,

where ΔR is the change in enterprise income.

By subtracting marginal costs from marginal revenue, we get marginal profit (it can also be negative). Obviously, the entrepreneur will increase the volume of production as long as he remains able to receive marginal profits, despite its decline due to the law of diminishing returns.

Source - Golikov M.N. Microeconomics: educational and methodological manual for universities. – Pskov: Publishing house PGPU, 2005, 104 p.

All theoretical articles

CATBACK.RU 2010-2017

1. The concept of costs. There is no production without costs. Costs are the costs of purchasing factors of production.

Costs can be calculated in different ways, therefore in economic theory, starting with A. Smith and D. Ricardo, there are dozens of different cost analysis systems. By the middle of the twentieth century. General principles of classification have emerged: 1) according to the cost estimation method and 2) in relation to the amount of production (Fig. 18.1).

Rice. 18.1.Classification of production costs

2. Economic, accounting, opportunity costs. If you look at purchase and sale from the position of the seller, then in order to receive income from the transaction, it is first necessary to recoup the costs incurred for the production of the goods.

Economic (opportunity) costs- these are business costs incurred, in the opinion of the entrepreneur, by him in the production process. They include:

1) resources acquired by the company;

2) internal resources of the company that are not included in market turnover;

3) normal profit, considered by the entrepreneur as compensation for risk in business.

It is the economic costs that the entrepreneur is obligated to compensate primarily through price, and if he fails to do this, he is forced to leave the market for another field of activity.

Accounting costs– cash expenses, payments made by a company in order to acquire the necessary factors of production on the side. Accounting costs are always less than economic ones, since they take into account only the real costs of purchasing resources from external suppliers, legally formalized, existing in an explicit form, which is the basis for accounting.

Accounting costs include direct and indirect costs. The former consist of costs directly for production, and the latter include costs without which the company cannot operate normally: overhead costs, depreciation charges, interest payments to banks, etc.

The difference between economic and accounting costs is opportunity cost.

Opportunity Cost- these are the costs of producing products that the company will not produce, since it uses resources in the production of this product. Essentially, the opportunity cost is this is the opportunity cost. Their value is determined by each entrepreneur independently, based on his personal ideas about the desired profitability of the business.

3. Fixed, variable, total (gross) costs. An increase in a firm's production volume usually entails an increase in costs. But since no production can develop indefinitely, costs are therefore a very important parameter in determining the optimal size of an enterprise. For this purpose, the division of costs into fixed and variable is used.

Fixed costs- the costs of a company that it incurs regardless of the volume of its production activities. These include: rent for premises, equipment costs, depreciation, property taxes, loans, salaries of management and administrative staff.

Variable costs– costs of the company, which depend on the volume of production. These include: costs of raw materials, advertising, wages, transport services, value added tax, etc. When production expands, variable costs increase, and when production decreases, they decrease.

The division of costs into fixed and variable is conditional and is acceptable only for a short period, during which a number of production factors are unchanged. In the long run, all costs become variable.

Gross costs is the sum of fixed and variable costs.

They represent the firm's cash costs to produce products. The connection and interdependence of fixed and variable costs as part of general costs can be expressed mathematically (formula 18.2) and graphically (Fig. 18.2).

F.C.+ V.C.= TC;

TC– F.C.=VC;

TC– V.C.= FC, (18.2)

Where F.C.– fixed costs; V.C.– variable costs; TC– total costs.

Rice. 18.2.Total firm costs

C– firm costs; Q– quantity of products produced; FG– fixed costs; VG– variable costs; TG– gross (total) costs.

4. Average costs.Average costs is the gross cost per unit of production.

Average costs can be calculated at the level of both fixed and variable costs, therefore all three types of average costs are usually called family of average costs.

Where ATC– average total costs; A.F.C.– average fixed costs; AVC– average variable costs; Q– quantity of products produced.

You can perform the same transformations with them as with constants and variables:

ATC= AFC+AVC;

AFC= ATC– AVC;

AVC= ATC– A.F.C.

The relationship between average costs can be depicted on a graph (Fig.

18.3. Average firm costs

C – company costs; Q – quantity of products produced.

5. Marginal firm.

It is important for an entrepreneur to know how his average total costs atc correlate with market avc at a price. In this case, three situations are possible when market prices:

a) lower costs;

b) higher costs;

c) equal to costs.

In situation a) the firm will be forced to exit the market. As a consequence, if demand remains unchanged, prices will rise and situation c) will occur.

In situation b) the firm will receive high income and other firms will join it. As a result, supply will exceed demand and prices will fall to c).

In situation c) the minimum value of average total costs coincides with the market price, i.e., it only covers it. It would seem that there is no incentive here - profit and the company will have to leave the market. But that's not true. The fact is that entrepreneurs include in their costs not only fixed and variable costs, but also opportunity costs. Therefore, in this situation there is a profit, but there is no excess profit due to the excess of demand over supply. Situation c) is the most typical on the market, and the company that finds itself in it is usually called ultimate by the company.

6. Marginal costs. An entrepreneur wants to know not only the minimum cost per unit of production, but also for the entire production volume. To do this, it is necessary to calculate marginal costs.

Marginal cost- These are additional costs associated with the production of one more additional unit of output.

Where MS– marginal costs; ?TC – change in total costs; ? Q– change in product output.

Calculation of marginal costs in comparison with average total and variable costs allows the entrepreneur to determine the volume of production at which his costs will be minimal.

A firm, increasing its production volume, incurs additional (marginal) costs for the sake of additional benefits, additional (marginal) income.

Marginal Revenue- This is the additional income that arises when production increases per unit of output.

Marginal revenue is closely related to gross income firm is its increase.

Gross income depends on the price level and production volumes, i.e.

TR= P x Q, (18.6)

Where TR- gross income; P- the price of the product; Q– volume of production of goods.

Then the marginal revenue is:

Where M.R.– marginal income.

7. Long-term costs. In a market economy, firms strive to develop a strategy for their development, which cannot be implemented without increasing production capacity and technical improvement of production. These processes take a long period, which leads to discreteness (discontinuity) of the state of the company over short periods (Fig. 18.4).

Rice. 18.6.Average costs in the long run

ATC– average total costs; ATC j-ATCV – average costs; LATC– long-term (resulting) average total cost curve.

The intersection line of the ATC curves, projected on the horizontal axis of the graph, shows at what volumes of production it is necessary to change the size of the plant to ensure further reduction in unit costs, and the point M shows the best production volume for the entire long period. curve LATC in educational literature is also often called selection curve, or wrapping curve.

Arcing LATC associated with positive and negative effects of increased scale of production. Up to point M, the effect is positive, and then it is negative. The scale effect does not always immediately change its sign: between positive and negative periods there may be a zone of constant returns from growth in production, where ATS will remain unchanged.

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Classification of a company's costs in the short term.

When analyzing costs, it is necessary to distinguish costs for the entire output, i.e. general (full, total) production costs, and production costs per unit of production, i.e. average (unit) costs.

Considering the costs of the entire output, one can find that when the volume of production changes, the value of some types of costs does not change, while the value of other types of costs is variable.

Fixed costs(F.C. – fixed costs) are costs that do not depend on the volume of production. These include the cost of maintaining buildings, major repairs, administrative and management costs, rent, property insurance payments, and some types of taxes.

The concept of fixed costs can be illustrated in Fig. 5.1. Let us plot the quantity of products produced on the x-axis (Q), and on the ordinate - costs (WITH). Then the fixed cost schedule (FC) will be a straight line parallel to the x-axis. Even when the enterprise does not produce anything, the value of these costs is not zero.

Rice. 5.1. Fixed costs

Variable costs(V.C. – variable costs) are costs, the value of which varies depending on changes in production volumes. Variable costs include costs of raw materials, supplies, electricity, workers' compensation, and costs of auxiliary materials.

Variable costs increase or decrease in proportion to output (Fig. 5.2). In the initial stages of production

Rice. 5.2. Variable costs

production, they grow at a faster rate than manufactured products, but as optimal output is reached (at the point Q 1) the growth rate of variable costs is decreasing. In larger firms, the unit cost of producing a unit of output is lower due to increased production efficiency, ensured by a higher level of specialization of workers and more complete use of capital equipment, so the growth of variable costs becomes slower than the increase in output. Subsequently, when the enterprise exceeds its optimal size, the law of diminishing returns comes into play and variable costs again begin to outstrip production growth.

Law of Diminishing Marginal Productivity (Profitability) states that, starting from a certain point in time, each additional unit of a variable factor of production brings a smaller increase in total output than the previous one. This law takes place when any factor of production remains unchanged, for example, production technology or the size of the production territory, and is valid only for a short period of time, and not over a long period of human existence.

Let us explain the operation of the law using an example. Let's assume that the enterprise has a fixed amount of equipment and workers work in one shift. If an entrepreneur hires additional workers, work can be carried out in two shifts, which will lead to an increase in productivity and profitability. If the number of workers increases further, and workers begin to work in three shifts, then productivity and profitability will increase again. But if you continue to hire workers, there will be no increase in productivity. Such a constant factor as equipment has already exhausted its capabilities. The addition of additional variable resources (labor) to it will no longer give the same effect; on the contrary, starting from this moment, the costs per unit of output will increase.

The law of diminishing marginal productivity underlies the behavior of the profit-maximizing producer and determines the nature of the supply function on price (the supply curve).

It is important for an entrepreneur to know to what extent he can increase production volume so that variable costs do not become very large and do not exceed the profit margin. The differences between fixed and variable costs are significant. A manufacturer can control variable costs by changing the volume of output. Fixed costs must be paid regardless of production volume and are therefore beyond the control of management.

General costs(TS– total costs) is a set of fixed and variable costs of the company:

TC= F.C. + V.C..

Total costs are obtained by summing the fixed and variable cost curves. They repeat the configuration of the curve V.C., but are spaced from the origin by the amount F.C.(Fig. 5.3).

Rice. 5.3. General costs

For economic analysis, average costs are of particular interest.

Average costs is the cost per unit of production. The role of average costs in economic analysis is determined by the fact that, as a rule, the price of a product (service) is set per unit of production (per piece, kilogram, meter, etc.). Comparing average costs with price allows you to determine the amount of profit (or loss) per unit of product and decide on the feasibility of further production. Profit serves as a criterion for choosing the right strategy and tactics for a company.

The following types of average costs are distinguished:

Average fixed costs ( AFC – average fixed costs) – fixed costs per unit of production:

АFC= F.C. / Q.

As production volume increases, fixed costs are distributed over an increasing number of products, so that average fixed costs decrease (Figure 5.4);

Average variable costs ( AVC – average variable costs) – variable costs per unit of production:

AVC= V.C./ Q.

As production volume increases AVC first they fall, due to increasing marginal productivity (profitability) they reach their minimum, and then, under the influence of the law of diminishing returns, they begin to increase. So the curve AVC has an arched shape (see Fig. 5.4);

average total costs ( ATS – average total costs) – total costs per unit of production:

ATS= TS/ Q.

Average costs can also be obtained by adding average fixed and average variable costs:

ATC= A.F.C.+ AVC.

The dynamics of average total costs reflects the dynamics of average fixed and average variable costs. While both are decreasing, average total costs are falling, but when, as production volume increases, the growth of variable costs begins to outpace the fall in fixed costs, average total costs begin to rise. Graphically, average costs are depicted by summing the curves of average fixed and average variable costs and have a U-shape (see Fig. 5.4).

Rice. 5.4. Production costs per unit of production:

MS – limit, AFC – average constants, АВС – average variables,

ATS – average total production costs

The concepts of total and average costs are not enough to analyze the behavior of a company. Therefore, economists use another type of cost - marginal.

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

The marginal cost category is of strategic importance because it allows you to show the costs that the company will have to incur if it produces one more unit of output or
save if production is reduced by this unit. In other words, marginal cost is a value that a firm can directly control.

Marginal costs are obtained as the difference between total production costs ( n+ 1) units and production costs n product units:

MS= TSn+1 – TSn or MS= D TS/D Q,

where D is a small change in something,

TS– total costs;

Q- volume of production.

Marginal costs are presented graphically in Figure 5.4.

Let us comment on the basic relationships between average and marginal costs.

1. Marginal costs ( MS) do not depend on fixed costs ( FC), since the latter do not depend on production volume, but MS- These are incremental costs.

2. While marginal costs are less than average ( MS< AC), the average cost curve has a negative slope. This means that producing an additional unit of output reduces average cost.

3. When marginal costs are equal to average ( MS = AC), this means that average costs have stopped decreasing, but have not yet begun to increase. This is the point of minimum average cost ( AC= min).

4. When marginal costs become greater than average costs ( MS> AC), the average cost curve slopes upward, indicating an increase in average costs as a result of producing an additional unit of output.

5. Curve MS intersects the average variable cost curve ( ABC) and average costs ( AC) at the points of their minimum values.

To calculate costs and evaluate the production activities of an enterprise in the West and in Russia, various methods are used. Our economy has widely used methods based on the category production costs, which includes the total costs of production and sales of products. To calculate the cost, costs are classified into direct, directly going towards the creation of a unit of goods, and indirect, necessary for the functioning of the company as a whole.

Based on the previously introduced concepts of costs, or costs, we can introduce the concept added value, which is obtained by subtracting variable costs from the total income or revenue of the enterprise. In other words, it consists of fixed costs and net profit. This indicator is important for assessing production efficiency.