Average production costs. Fixed, variable, average costs

The goal of most business entities is to make a profit from the sale of goods and provision of services. However, in order to sell a product, you must first purchase it from another company or produce it yourself. In both cases, the matter does not come without costs.

Costs are the cost of resources consumed in the production process (in particular, materials, raw materials, worker labor, etc.). In other words, these are all economic resources that were used to produce certain goods, expressed in a single monetary equivalent.

Costs that form the cost of the final product, services provided or work performed in a certain period and can be reliably estimated constitute production costs.

Classification of costs

The growing unprofitability of business entities in various industries indicates the need to improve the efficiency of cost management. To manage them rationally, enterprise costs are classified according to various criteria.

Each manufacturer, due to limited resources in the course of its activities, is faced with the need to compare several alternatives and settle on one of them. This choice is permanent. Costs play a key role in solving this problem. They allow you to estimate the cost of production of a particular product. The part of costs that depends on a particular option is taken into account. These costs are called relevant. They are the ones that management takes into account to make the best decision. In contrast, irrelevant costs do not depend on the chosen alternative and will be incurred by the enterprise in any case.

In management accounting, sunk costs are also identified. Their value cannot be affected by any of the decisions made.

For the purpose of effective management, incremental and marginal costs are calculated. The company bears the first costs when releasing an unplanned batch of products. The costs that a company incurs in producing one additional unit of product are called marginal.

The enterprise's costs are planned taking into account the expected production volumes, norms and limits. They relate to the planned cost of production. However, there are also unplanned costs that arise in reality. An example would be marriage.

Depending on whether the amount of costs incurred varies with output volumes, they are classified into fixed and variable production costs.

Fixed costs

The peculiarity of the former is that they do not change over a short period of time. If an enterprise decides to increase or, on the contrary, reduce production, such costs remain at the same level. Fixed costs are rent production premises, warehouses, retail outlets; salaries of administrative employees; costs of maintaining buildings, in particular public utilities. However, it must be taken into account that only the amount of total costs for the entire output is constant. Costs calculated per unit of production will decrease in direct proportion to the increase in production volumes. This is a pattern.

Variable production costs

As soon as a business entity begins to produce products, variable costs. Their main share is formed by used working capital. While fixed costs remain relatively stable for the enterprise, variables directly depend on output volumes. The larger the production volumes, the higher the costs.

Composition of variable costs

Variable production costs include the cost of materials and raw materials. During their planning, standards for material consumption relative to a unit of finished product are used for calculation.

The next variable cost item is labor costs. These include the salaries of key personnel involved in production, support employees, craftsmen, technologists, as well as service personnel(loaders, cleaners). In addition to the basic salary, bonuses, compensation and incentive amounts are taken into account, as well as wages for employees who are not on the main staff.

In addition to materials and raw materials, most business entities incur costs for the purchase of auxiliary materials, semi-finished products, spare parts, components and fuel, without which in most cases the production process is impossible.

Classification of variable costs

As noted earlier, the amount of variable costs depends on the volume of products produced. However, these indicators do not always change in equal proportions. Based on the nature of the dependence of costs on the quantity of products produced, they are classified into progressive, digressive and proportional.

According to the method of including variable costs in the cost of production, they are divided into direct and indirect. If the former are immediately transferred to the cost of the released good, then the latter are distributed among various types of products. For this purpose, a distribution base is selected. This could be the cost of raw materials or the salaries of key workers. Indirect costs production are represented by administrative and management costs, costs for staff development, social sphere and production infrastructure.

For effective management calculate total and average variable production costs. To determine the last indicator, the total amount of costs is divided by the number of products produced.

Gross production costs of the enterprise

In order to assess the profitability of producing a particular product, an enterprise needs to calculate gross (total) costs. In the short term, they are formed by a combination of variable and fixed costs. If, for some reason, the enterprise does not produce products, then the gross costs are equal to constant ones. As production volumes increase during economic activity total costs increase by the sum of variables depending on the quantity of products manufactured.

Enterprise expenses can be considered in the analysis from various points of view. Their classification is based on various signs. From the perspective of the influence of product turnover on costs, they can be dependent or independent of increased sales. Variable costs, the definition of which requires careful consideration, allow the head of the company to manage them by increasing or decreasing sales of finished products. That is why they are so important for understanding the proper organization of the activities of any enterprise.

General characteristics

Variable Costs (VC) are those costs of an organization that change with an increase or decrease in the growth of sales of manufactured products.

For example, when a company ceases operations, variable costs should be zero. In order for a company to operate effectively, it will need to regularly evaluate its costs. After all, they influence the cost of finished products and turnover.

Such points.

• The book value of raw materials, energy resources, materials that are directly involved in the production of finished products.
• Cost of manufactured products.
• Salaries of employees depending on the implementation of the plan.
• Percentage from the activities of sales managers.
• Taxes: VAT, tax according to the simplified tax system, unified tax.

Understanding Variable Costs

In order to correctly understand such a concept as variable costs, an example of their definition should be considered in more detail. Thus, production, in the process of carrying out its production programs, spends a certain amount of materials from which the final product will be made.

These costs can be classified as variable direct costs. But some of them should be separated. A factor such as electricity can also be classified as a fixed cost. If the costs of lighting the territory are taken into account, then they should be classified in this category. Electricity directly involved in the manufacturing process of products is included in short term to variable costs.

There are also costs that depend on turnover, but are not directly proportional production process. This trend may be caused by insufficient (or over) utilization of production, or a discrepancy between its designed capacity.

Therefore, in order to measure the effectiveness of an enterprise in managing its costs, variable costs should be considered as subject to a linear schedule along the segment of normal production capacity.

Classification

There are several types of variable cost classifications. With changes in sales costs, they are distinguished:

• proportional costs, which increase in the same way as production volume;
• progressive costs, increasing at a faster rate than sales;
• degressive costs, which increase at a slower rate with increasing production rates.

According to statistics, a company's variable costs can be:

• general (Total Variable Cost, TVC), which are calculated for the entire product range;
• average (AVC, Average Variable Cost), calculated per unit of product.

According to the method of accounting for the cost of finished products, a distinction is made between variables (they are easy to attribute to the cost) and indirect (it is difficult to measure their contribution to the cost).

Regarding the technological output of products, they can be production (fuel, raw materials, energy, etc.) and non-production (transportation, interest to the intermediary, etc.).

General variable costs

The output function is similar to variable cost. It is continuous. When all costs are brought together for analysis, the total variable costs for all products of one enterprise are obtained.

When common variables are combined and their total sum in the enterprise is obtained. This calculation is carried out in order to identify the dependence of variable costs on production volume. Next, use the formula to find variable marginal costs:

MC = ΔVC/ΔQ, where:

• MC - marginal variable costs;
• ΔVC - increase in variable costs;
• ΔQ is the increase in output volume.

Calculation of average costs

Average variable costs (AVC) are the company's resources spent per unit of production. Within a certain range, production growth has no effect on them. But when the design power is reached, they begin to increase. This behavior of the factor is explained by the heterogeneity of costs and their increase at large scales of production.

The presented indicator is calculated as follows:

AVC=VC/Q, where:

• VC - the number of variable costs;
• Q is the quantity of products produced.

In terms of measurement, average variable costs in the short run are similar to the change in average total costs. The greater the output of finished products, the more total costs begin to correspond to the increase in variable costs.

Calculation of variable costs

Based on the above, we can define the variable cost (VC) formula:

• VC = Material costs + Raw materials + Fuel + Electricity + Bonus salary + Percentage on sales to agents.
• VC = Gross profit - fixed costs.

The sum of variable and fixed costs is equal to the total costs of the organization.

The calculations of which were presented above participate in the formation of their overall indicator:

Total costs = Variable costs + Fixed costs.

Example definition

To better understand the principle of calculating variable costs, you should consider an example from the calculations. For example, a company characterizes its product output with the following points:

• Costs of materials and raw materials.
• Energy costs for production.
• Salaries of workers producing products.

It is argued that variable costs grow in direct proportion to the increase in sales of finished products. This fact is taken into account to determine the break-even point.

For example, it was calculated that it amounted to 30 thousand units of production. If you plot a graph, the break-even production level will be zero. If the volume is reduced, the company’s activities will move to the level of unprofitability. And similarly, with an increase in production volumes, the organization will be able to receive a positive net profit result.

How to reduce variable costs

The strategy of using “economies of scale”, which manifests itself when production volumes increase, can increase the efficiency of an enterprise.

The reasons for its appearance are the following.

1. Using the achievements of science and technology, conducting research, which increases the manufacturability of production.
2. Reducing management salary costs.
3. Narrow specialization of production, which allows you to perform each stage of production tasks with better quality. At the same time, the defect rate decreases.
4. Introduction of technologically similar product production lines, which will ensure additional capacity utilization.

At the same time, variable costs are observed below sales growth. This will increase the efficiency of the company.

Having become familiar with the concept of variable costs, an example of the calculation of which was given in this article, financial analysts and managers can develop a number of ways to reduce overall production costs and reduce production costs. This will make it possible to effectively manage the rate of turnover of the enterprise’s products.

All types of company costs in the short term are divided into fixed and variable.

Fixed costs(FC - fixed cost) - such costs, the value of which remains constant when the volume of output changes. Fixed costs are constant at any level of production. The company must bear them even if it does not produce products.

Variable costs(VC - variable cost) - these are costs, the value of which changes when the volume of output changes. Variable costs increase as production volume increases.

Gross costs(TC - total cost) is the sum of fixed and variable costs. At zero level of output, gross costs are constant. As production volume increases, they increase in accordance with the increase in variable costs.

Examples should be given various types costs and explain their changes due to the law of diminishing returns.

The average costs of the company depend on the value of total constants, total variables and gross costs. Average costs are determined per unit of output. They are usually used for comparison with unit price.

In accordance with the structure of total costs, a company distinguishes between average fixed costs (AFC - average fixed cost), average variable costs (AVC - average variable cost), and average total costs (ATC - average total cost). They are defined as follows:

ATC = TC: Q = AFC + AVC

One important indicator is marginal cost. Marginal cost(MC - marginal cost) is the additional costs associated with the production of each additional unit of output. In other words, they characterize the change in gross costs caused by the release of each additional unit of output. In other words, they characterize the change in gross costs caused by the release of each additional unit of output. Marginal costs are defined as follows:

If ΔQ = 1, then MC = ΔTC = ΔVC.

The dynamics of the firm's total, average and marginal costs using hypothetical data are shown in Table.

Dynamics of total, marginal and average costs of a company in the short term

Based on table Let's build graphs of fixed, variable and gross, as well as average and marginal costs.

The fixed cost graph FC is a horizontal line. The graphs of variable VC and gross TC costs have a positive slope. In this case, the steepness of the VC and TC curves first decreases and then, as a result of the law of diminishing returns, increases.

The AFC average fixed cost schedule has a negative slope. The curves for average variable costs AVC, average gross costs ATC and marginal costs MC have an arcuate shape, that is, they first decrease, reach a minimum, and then take on an upward appearance.

Attracts attention relationship between graphs of average variablesAVCand marginal MC costs, and also between the curves of average gross ATC and marginal MC costs. As can be seen in the figure, the MC curve intersects the AVC and ATC curves at their minimum points. This is because as long as the marginal, or incremental, cost associated with producing each additional unit of output is less than the average variable or average gross cost that existed before the production of that unit, average costs decrease. However, when the marginal cost of a particular unit of output exceeds the average cost before it was produced, average variable costs and average gross costs begin to increase. Consequently, equality of marginal costs with average variable and average gross costs (the points of intersection of the MC schedule with the AVC and ATC curves) is achieved at minimum value the latter.

Between marginal productivity and marginal cost there is a reverse addiction. As long as the marginal productivity of a variable resource increases and the law of diminishing returns does not apply, marginal cost decreases. When marginal productivity is at its maximum, marginal cost is at its minimum. Then, as the law of diminishing returns takes effect and marginal productivity declines, marginal cost increases. Thus, the marginal cost curve MC is a mirror image of the marginal productivity curve MR. A similar relationship also exists between the graphs of average productivity and average variable costs.

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. cost.

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 economic theory opportunity cost or opportunity cost. 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 the 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 revolution, spent on the purchase of raw materials and supplies for each production cycle called negotiable. 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 - the ratio of the amount of annual depreciation to the cost of fixed assets production 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, allowing for more frequent replacement of equipment at enterprises. In addition, accelerated depreciation can be carried out within state support 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 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 product.

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 in production allows us to purchase necessary materials and instruments 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 run, entrepreneurs receive only the so-called normal profit, and economic profit absent). 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 option 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: teaching aid for universities. – Pskov: Publishing house PGPU, 2005, 104 p.

Production costs - purchase costs economic resources consumed in the process of producing certain goods.

Any production of goods and services, as is known, is associated with the use of labor, capital and natural resources, which are factors of production whose value is determined by production costs.

Due to limited resources, the problem arises of how best to use them among all rejected alternatives.

Opportunity costs are the costs of producing goods, determined by the cost of the best lost opportunity to use production resources, ensuring maximum profit. The opportunity costs of a business are called economic costs. These costs must be distinguished from accounting costs.

Accounting costs are different from economic costs in that they do not include the cost of factors of production that are owned by the owners of firms. Accounting costs are less than economic costs by the amount of implicit earnings of the entrepreneur, his wife, implicit land rent and implicit interest on equity owner of the company. In other words, accounting costs equal to economic minus all implicit costs.

The options for classifying production costs are varied. Let's start by distinguishing between explicit and implicit costs.

Explicit costs are opportunity costs that take the form of cash payments to the owners of production resources and semi-finished products. They are determined by the amount of company expenses to pay for purchased resources (raw materials, materials, fuel, labor force etc.).

Implicit (imputed) costs are the opportunity costs of using resources that belong to the firm and take the form of lost income from the use of resources that are the property of the firm. They are determined by the cost of resources owned by a given company.

The classification of production costs can be carried out taking into account the mobility of production factors. Constants, variables and total costs.

Fixed costs (FC) - costs, the value of which is short period does not change depending on changes in production volume. These are sometimes called "overhead" or "sunk costs". Fixed costs include maintenance costs industrial buildings, purchase of equipment, rental payments, interest payments on debts, salaries of management personnel, etc. All these expenses must be financed even when the company does not produce anything.

Variable costs (VC) are costs whose value changes depending on changes in production volume. If products are not produced, then they are equal to zero. Variable costs include the costs of purchasing raw materials, fuel, energy, transport services, wages for workers and employees, etc. In supermarkets, payment for the services of supervisors is included in variable costs, since managers can adjust the volume of these services to the number of customers.

Total costs (TC) - the total costs of a company, equal to the sum of its fixed and variable costs, are determined by the formula:

Total costs increase as production volume increases.

Costs per unit of goods produced take the form of average fixed costs, average variable costs and average total costs.

Average fixed cost (AFC) is the total fixed cost per unit of output. They are determined by dividing fixed costs (FC) by the corresponding quantity (volume) of products produced:

Since total fixed costs do not change, when divided by an increasing volume of production, average fixed costs will fall as the quantity of output increases, because a fixed amount of costs is distributed over more and more more units of production. Conversely, as production volume decreases, average fixed costs will increase.

Average variable cost (AVC) is the total variable cost per unit of output. They are determined by dividing variable costs by the corresponding quantity of output:

Average variable costs first fall, reaching their minimum, then begin to rise.

Average (total) costs (ATC) are the total production costs per unit of output. They are defined in two ways:

a) by dividing the sum of total costs by the number of products produced:

b) by summing average fixed costs and average variable costs:

ATC = AFC + AVC.

At the beginning, average (total) costs are high because the volume of output is small and fixed costs are high. As production volume increases, average (total) costs decrease and reach a minimum, and then begin to rise.

Marginal cost (MC) is the cost associated with producing an additional unit of output.

Marginal costs are equal to the change in total costs divided by the change in volume produced, that is, they reflect the change in costs depending on the quantity of output. Since fixed costs do not change, fixed marginal costs are always zero, i.e. MFC = 0. Therefore, marginal costs are always marginal variable costs, i.e. MVC = MC. It follows from this that increasing returns to variable factors reduce marginal costs, while decreasing returns, on the contrary, increase them.

Marginal costs show the amount of costs that a firm will incur when increasing production by the last unit of output, or the amount of money that it will save if production decreases by a given unit. When the additional cost of producing each additional unit of output is less than the average cost of the units already produced, producing that next unit will lower the average total cost. If the cost of the next additional unit is higher than average cost, its production will increase average total cost. The above applies to a short period.

In the practice of Russian enterprises and in statistics, the concept of “cost” is used, which is understood as the monetary expression of the current costs of production and sales of products. Costs included in the cost include costs for materials, overheads, wages, depreciation, etc. The following types of cost are distinguished: basic - the cost of the previous period; individual - the amount of costs for the manufacture of a specific type of product; transportation - costs of transporting goods (products); products sold, current - assessment of sold products at restored cost; technological - the amount of costs for organization technological process manufacturing products and providing services; actual - based on actual costs for all cost items for a given period.

G.S. Bechkanov, G.P. Bechkanova