Money

The cost of production in a firm is made up of Production costs - Economic theory (Golovachev A.S.)

Under costs production understand the cost of manufacturing products. From the point of view of society, the costs of producing goods are equal to the total costs of labor (living and materialized, necessary and surplus). From the point of view of the enterprise, due to its economic isolation, only its own expenses are included in the cost structure. Moreover, these costs are divided into external and internal.
External (explicit) costs are direct cash payments to resource providers. Explicit costs include wages of workers and salaries of managers, payments to trading firms, banks, payment for transport services, and much more.
Internal(implicit) costs (imputed): costs for own and self-used resource, opportunity costs that are not provided for by contracts, are obligatory for explicit payments, and therefore remain unreceived in monetary form (use of premises or transport owned by the company, own labor of the owner of the company, etc. .d.)

Internal ed. are included in fixed costs and variable ed. + normal profit.
Economists consider all costs, both external and internal, to be costs.
Fixed, variable and general (cumulative) costs.
Fixed costs are those costs that do not change with changes in the volume of production. These include: liabilities on loans and credit, rent payments, depreciation of buildings and equipment, insurance premiums, rent, salaries of senior staff and leading specialists, etc.

Variables are called costs, the value of which varies depending on the change in the volume of production: the cost of raw materials, fuel, energy, transport services, wages, etc.

The total cost is the total cost of the firm.
The distinction between fixed and variable costs is essential, since variable costs can be controlled and changed by the entrepreneur, while fixed costs are outside the control of the company's management and are mandatory.

Analysis of the level of coverage of production costs allows you to determine the amount of products that need to be released in order to recover costs and make a profit, as well as determine the optimal price of products.

Fixed and variable costs. Production costs are the sum of the costs of acquiring factors of production. In 1923, the American economist J. Clark introduced the division of costs into fixed and variable. If in the Marxist concept fixed costs represent the cost of constant capital, then J. Clarke refers to them as those costs that do not depend on the volume of products produced. Variable costs include costs, the value of which directly depends on the quantity of products produced (costs of raw materials, materials, wages). The structures of fixed and variable costs are shown in fig. 11.1 and fig. 11.2.

Division into fixed and variable costs It is carried out only for a short period during which the firm cannot change constant factors (buildings, structures, equipment). There are no fixed costs in the long run. All costs become variable, as all factors are subject to change, improvement and renewal.

Gross costs- a set of fixed and variable costs in the form of cash costs for the production of a certain volume of products.

To measure the costs per unit of production, indicators of average costs, average fixed and average variable costs are used.

Average cost are formed by dividing gross costs by the quantity of goods produced.

Average constants are obtained by dividing fixed costs by the number of products created.

Average variables are determined by dividing variable costs by the quantity of goods manufactured. Fixed, variable and gross costs are presented in fig. 11.3.

It can be seen from the graph that fixed costs are constant. This is due to the fact that they are associated with the existence of the company, equipping with production equipment, tooling, energy devices. All this must be paid in advance. On the chart, these expenses amount to 250 thousand rubles.

These costs remain unchanged at all levels of output, including zero. Variable costs increase in direct proportion to the increase in output. However, the increase in variable costs per unit of output is not constant. At the initial stage, variable costs increase at a slow pace. In our example, this happens before the release of the 5th unit of production. Then variable costs begin to increase at an increasing rate, which is due to the law of diminishing returns.

Gross costs increase as variable costs increase. At zero output, total costs equal the sum of fixed costs. In our example, they amount to 250 thousand rubles.

The situation is similar when hiring a worker of a certain qualification. The wages paid to him appear to the entrepreneur in the form of an opportunity cost, since the firm has chosen a specific worker from all other alternatives, having missed the opportunity to use the services of another individual. Opportunity costs are determined in the same way when using any resource. Opportunistic costs are divided into external and internal.

External(“explicit”) costs are cash payments that a company makes when purchasing raw materials, materials, equipment “from outside”, that is, from suppliers that are not part of the company.

Internal(“implicit”) costs are unpaid costs for resources owned by the firm. They are equal to cash payments that could be received by transferring them to other entrepreneurs for independent use. Internal costs include: the salary of an entrepreneur, which he could receive while performing the duties of a manager in another firm; non-received funds in the form of rent, which can be obtained when renting out premises; non-received cash in the form of interest on capital, which the company could have received if they were placed on a bank deposit.

When determining the strategy of the company's behavior, the additional costs associated with an increase in the number of products produced are of great importance. Such costs are called marginal costs.

marginal cost is the incremental cost that is caused by the production of an additional unit of a product. Marginal costs are sometimes called differential costs (i.e., difference costs). Marginal cost is defined as the difference between subsequent and previous gross costs.

Average cost curves. A more detailed study of the effectiveness of the functioning of the company can be done by measuring the costs of producing a unit of output. For these purposes, the categories of average general - ATC, average fixed - AFC, average variable costs - AVC are used. Graphically, they can be depicted as follows (Fig. 11.5).

Average cost curve ATC has an arcuate shape. This is due to the fact that up to the point M they are dominated by fixed costs. A.F.C.. After the dot M the main influence on the value of average costs begin to have not fixed, but variable costs AVC, and due to the law of diminishing returns, the average cost curve begins to rise.

At the point M average total costs reach a minimum value per unit of output. At the same time, it must be taken into account that the marginal cost curve is not related to fixed costs, they do not depend on whether the firm reduces or increases output. Therefore, we will not depict the curve of average fixed costs on the graph. As a result, the graph will take the following form (Fig. 11.6).

Marginal cost curve MS at the initial stage it goes down as a result of the fact that marginal costs are determined by variable costs. At the point S 1 limit curves MS and variables AVC costs overlap.

This indicates that the variable costs for this type of product begin to increase and the firm must stop producing this type of product. However, this does not mean that the company becomes unprofitable and may go bankrupt. Fixed costs for this type of product, the company can block income from the sale of other goods.

At the point S the curves of the mean totals intersect ATS and marginal MS costs. In the theory of market economy, this point is called the point of equal opportunity or the minimum profitability of the firm. Dot S 2 and the corresponding production volume q S 2 means that the firm can provide the maximum possible supply of goods with full use of production capacity and available resources.

Every business has costs. If they are not there, then there is no product to be put on the market. To produce something, you need to spend money on something. Of course, the lower the costs, the more profitable the business.

However, following this simple rule requires the entrepreneur to take into account a large number of nuances that reflect the variety of factors that affect the success of the company. What are the most remarkable aspects that reveal the essence and varieties of production costs? What determines business efficiency?

A bit of theory

Production costs, according to a common interpretation among Russian economists, are the costs of an enterprise associated with the acquisition of so-called "factors of production" (resources without which it is impossible to produce a product). The lower they are, the more economically profitable the business is.

Production costs are measured, as a rule, in relation to the total cost of the enterprise. In particular, a separate class of expenses may be those associated with the sale of manufactured products. However, it all depends on the methodology used in classifying costs. What are the options here? Among the most common in the Russian marketing school there are two of them: the methodology of the "accounting" type, and the one that is called "economic".

According to the first approach, production costs are the total set of all actual expenses associated with the business (purchase of raw materials, rent of premises, payment of utilities, staff compensation, etc.). "Economic" methodology involves the inclusion of those costs, the value of which is directly related to the lost profits of the company.

In accordance with popular theories, which Russian marketers adhere to, production costs are divided into fixed and variable. Those that belong to the first type, as a rule, do not change (if we talk about short-term time periods) depending on the increase or decrease in the rate of output of the goods.

fixed type costs

Fixed production costs are, most often, such items of expenditure as rent of premises, remuneration of administrative personnel (managers, leaders), obligations to pay certain types of contributions to social funds. If they are presented in the form of a graph, it will be a curve that is directly dependent on the volume of production.

As a rule, business economists calculate the average costs of production from those that are fixed. They are calculated based on the volume of costs per unit of manufactured goods. Usually, as the volume of output of goods increases, the "schedule" of average costs descends. That is, as a rule, the greater the productivity of the factory, the cheaper the unit product.

variable costs

The production costs of the enterprise, which are related to variables, in turn, are very susceptible to changes in the volume of output. These include the cost of purchasing raw materials, paying for electricity, and compensating staff at the level of specialists. It is understandable: more material is needed, energy is wasted, new personnel are needed. A graph showing the dynamics of variable costs is usually unstable. If a company is just starting to produce something, then these costs usually increase more actively in comparison with the rate of increase in production.

But as soon as the factory reaches a sufficiently intensive turnover, then the variable costs, as a rule, do not grow so actively. As in the case of fixed costs, the second type of cost is often calculated as an average - again, relative to the output of a unit of output. The total of fixed and variable costs is the total cost of production. Usually they just add up mathematically when analyzing the economic performance of a company.

Costs and depreciation

Such phenomena as depreciation and the closely related term "wear and tear" are directly related to production costs. Through what mechanisms?

First, let's define what wear is. This, according to the interpretation common among Russian economists, is a decrease in the value of production resources in force. Depreciation can be physical (when, for example, a machine or other equipment simply breaks down or cannot withstand the previous rates of output of goods), or moral (if the means of production used by the enterprise, say, are much inferior in efficiency to those used in competing factories ).

A number of modern economists agree that obsolescence is a fixed cost of production. Physical - variables. The costs associated with maintaining the volume of output of goods, subject to wear and tear of equipment, form the same depreciation charges.

As a rule, this is due to the purchase of new equipment or investments in the repair of the current one. Sometimes - with a change in technological processes (for example, if a machine that produces spokes for wheels fails at a bicycle factory, then their production can be given temporarily or on an indefinite basis to "outsourcing", which, as a rule, increases the cost of production of finished products).

Thus, timely modernization and purchase of high-quality equipment is a factor that significantly affects the reduction of production costs. Newer and more modern technology in many cases involves lower depreciation costs. Sometimes the costs associated with the wear and tear of equipment are also affected by the qualifications of the personnel.

As a rule, more experienced craftsmen handle the technique more carefully than beginners, and therefore it may make sense to invest in inviting expensive, highly qualified specialists (or invest in training young ones). These costs may be lower than the investment in depreciation of equipment heavily exploited by inexperienced newcomers.

No activity is possible without costs. Costs are one of the indicators of the efficiency and intensity of resource consumption. The profitability of the organization depends on their size. One of the requirements that is imposed on the leaders of commercial enterprises is the rational use of resources. To achieve this goal, it is necessary to be able to calculate, analyze and optimize the company's costs. How to do it right, you will learn from our article.

Definition

Costs are the costs of producing, transporting and storing goods. Their value depends on the prices of consumed resources. Stocks of the latter are limited. The use of some resources means the rejection of others. From this we can conclude that all costs of the firm are inherently alternative. For example, the steel used in the automotive industry is lost to the manufacture of machine tools. And the labor costs of a locksmith are equivalent to his contribution to the production of, for example, refrigerators.

Types of expenses

External (cash) costs are the company's costs for factors of production (wages, purchase of raw materials and materials, social needs, rent of premises, etc.). The purpose of these payments is to attract a certain amount of resources. This will lead to their distraction from alternative use cases. Such expenses are also called accounting expenses.

Internal (implicit) costs are the costs of the firm's own resources (cash, equipment, etc.). That is, if the organization is located in the premises that it owns, then it loses the opportunity to rent it out and receive income from it. Although internal costs are hidden and are not displayed in the BU, they still need to be taken into account when making management decisions.

The second type of cost also includes "normal profit" - the minimum income that an entrepreneur must receive in order to be able to continue in this business. It should be no less than the remuneration from an alternative type of activity.

Entrepreneurial costs include:

accounting expenses;
normal profit;
customs duties, if any.

Alternative classification

Implicit costs are hidden, but they still need to be considered. The situation is different with sunk costs: they are visible, but they are always ignored. These are expenses that were made in the past and cannot be changed in the present. An example of such costs is the purchase of custom-made machinery that can be used to produce one type of product. The cost of manufacturing such a machine is a sunk cost. The opportunity cost in this case is zero. This type also includes R&D, marketing research, etc. There are also avoidable costs, that is, those that can be prevented: "promotion" of a new product in the media, etc.

Since the value of external and internal costs does not match, there are differences in the volumes of accounting and economic profits. The first is sales revenue less explicit cash costs. Economic profit is the difference between sales revenue and all costs.

Types of costs in the short run

In the short term, all costs are divided into fixed and variable. At the same time, it is important to distinguish between total costs for the entire volume of production and per unit - average costs. Let's consider each type in detail.

Fixed (FC) costs do not depend on the volume of manufactured products (Q) and appear before the start of production: equipment depreciation, security salaries, etc. They are also called the costs of creating conditions for activity. That is, if the volume of production is reduced by 20%, the value of such costs will not change.

Variable (VC) costs vary depending on the workload of production: materials, wages of workers, transportation, etc. For example, metal costs in a pipe mill will increase by 5% with a 5% increase in pipe production. That is, changes occur proportionally.

Total costs: TC = FC + VC.

The value of fixed and variable costs varies with the growth of production volume, but not equally. In the early stages of an organization's development, they grow rapidly. As production volumes increase, their pace slows down.

Average cost

Per unit of output, specific fixed (AFC) and variable (AVC) costs are also calculated:

With an increase in the rate of production, fixed costs are distributed over the entire volume, and AFC decreases. But variable unit costs first decrease to a minimum, and then, under the influence of the law of diminishing returns, begin to grow. Total costs are also calculated per unit of output:

Unit total costs change in a similar way. While the average constants (AFC) and variables (AVC) are decreasing, ATC is also decreasing. And with the growth of production, these values also increase.

Additional classification

For the purposes of economic analysis, an indicator such as marginal cost (MC) is used. It represents the increase in the cost of manufacturing an additional unit of the item:

MS = A TCn - A TCn-l.

Marginal cost determines how much a firm will pay if it increases output by one unit. The organization can influence the size of these costs.

It is important to be able to calculate all the considered types of costs.

Data processing

Cost analysis shows:

when MC< AVC + ATC, изготовление дополнительной единицы продукции снижает удельные переменные и общие затраты;
when MC > AVC + ATC, the production of an additional unit increases the average variable and total costs;
when MC = AVC + ATC, unit variables and total costs are minimal.

Calculation of costs in the long run

The costs discussed above were decisions that needed to be made immediately. For example, to determine how much you can increase the production of goods that will be sold at a discount. In the long run, the organization can change all factors of production, that is, all costs become variable. But if the enterprise reaches a volume at which ATS increase, then it is necessary to adjust the constant factors of production.

Based on the ratio of the rate of change in production costs and the volume of production, the following are distinguished:

positive return - the growth rate of production is higher than total costs. Unit costs are reduced;
diminishing returns - costs increase faster than production. Unit costs increase;
constant return - the growth rates of production and costs are approximately the same.

Positive returns to scale are due to:

specialization of labor in large-scale production reduces costs;
it is possible to use the waste of the main production for the production of additional products.

The negative effect is caused by an increase in management costs, a decrease in the effectiveness of interaction between departments.

While the positive effect dominates, the average long-term costs decrease, in the reverse situation they increase, and when they are equal, the costs practically do not change.

Pricing

Production costs - expressed in monetary terms, the cost of all factors of production. This is a very important indicator that is used to calculate the price. Costs and profits are closely related. Therefore, the main goal of cost analysis is to identify the optimal ratio between these indicators.

The classification of expenses makes economic sense and is used in practice to solve the following problems:

assessment of the competitiveness of the organization;
regulation of profit growth by reducing certain categories of expenses;
definitions of "margin of financial strength";
calculating the price of products through marginal costs.

To maintain the optimal pricing policy in the market, it is necessary to constantly analyze the level of costs. For this purpose, it is customary to calculate gross costs (AC) per item unit. The curve of these costs on the graph has a U-shaped form. In the early stages, the costs are high, as large fixed costs are spread over a small amount of items. As the rate of AVC increases per unit, the costs decrease and reach their minimum. When the law of diminishing returns begins to operate, that is, variable costs have a greater influence on the level of costs, the curve will begin to move up. In the same industry, firms with different scales, levels of scientific and technical progress and costs are simultaneously operating. Therefore comparison of average costs allows to estimate a position of the organization in the market.

Example

Let's calculate the various types of costs and their changes using the example of CJSC.

Expenses							Deviations (2011 and 2012)
Expenses	amount, thousand rubles	beats weight, %	amount, thousand rubles	beats weight, %	amount, thousand rubles	beats weight, %	amount, thousand rubles	beats weight, %
Raw material
Salary
Social Security contributions
Depreciation
Other expenses
TOTAL

The table shows that the largest share falls on other expenses. In 2012, their share decreased by 0.8%. At the same time, there was a decrease in material costs by 1%. But the share of wage payments increased by 1.3%. Depreciation and social contributions account for the least expenses.

A large proportion of other costs can be explained by the specifics of the enterprise. This category includes payment for various services to third parties, which is associated with the sale of goods: reception, storage, transportation of raw materials, etc.

Now consider the impact of turnover on costs. To do this, it is necessary to calculate the absolute value of the deviations, divide them into constants and variables, and then analyze the dynamics.

Indicator	Deviation, thousand rubles	Growth rate, %
Goods turnover, t. rub.
Distribution costs, thousand rubles
The level of costs to turnover
Variable costs, thousand rubles
Fixed costs, thousand rubles

The reduction in turnover by 31.9% led to a reduction in distribution costs by 18 thousand rubles. But these same costs in relation to the turnover increased by 5.18%. The following table shows how production volume affects the largest cost items.

Name of articles	Periods				The amount of costs recalculated to goods, thousand rubles.	Change, thousand rubles
						absolute deviation	Including
	amount, thousand rubles	% to goods	amount, thousand rubles	% to goods			at the expense of goods	overspending
Fare
Shipment from the warehouse
Drying
Storage
Shipment
Total
Trade turnover

Decrease in trade turnover by 220 million rubles. led to a decrease in variable costs by an average of 1%. At the same time, almost all cost items in absolute terms decreased by 4-7 thousand rubles. In general, an overspending in the amount of 22.9 million rubles was received.

How to cut costs

Reducing costs requires capital, labor and finance. This step is justified when the useful effect of the product increases or the price decreases in competition.

Cost reduction is affected by changes:

turnover structures;
the time of circulation of goods;
commodity prices;
labor productivity;
operational efficiency of the material and technical base;
the level of scientific and technical progress at the enterprise;
implementation conditions.

Ways to increase the level of scientific and technical progress:

full use of production capacity (economical consumption of materials and fuel);
creation of new machines, equipment and technologies.

The development of resource-saving technologies in Russia has been going on for 20 years. But with the development of market relations, the introduction of NTP developments at industrial enterprises slowed down. Therefore, in the current conditions it is more expedient to optimize labor productivity. Experts' calculations showed that its growth by 40% depends on the improvement of technology and 60% on the human factor.

It is very important to correctly determine the methods of encouraging staff. E. Mayo believed that any motivation is based on the satisfaction of social needs. During experiments conducted in 1924-1936. at a Western Electric plant in Illinois, a sociologist was able to prove that informal relationships between employees matter more than working conditions or financial incentives. Modern researchers argue that social significance in itself is very important for a person. If it is complemented by the ability to help people, to be useful, then productivity increases without material costs. This direction of stimulation is especially important for employees who work by vocation. But that doesn't mean that competitive wage levels don't matter. Wages should increase with the growth of production efficiency.

Summary

Costs and profits are closely related. It is impossible to generate income without investing capital, human or material resources. In order to increase the level of profit, costs must be correctly calculated and analyzed. There are many different classifications, but the most important of them is the division of costs into fixed and variable. The former do not depend on the volume of products produced and exist to ensure working conditions. The latter change in proportion to the rate of production growth.

Fixed and variable costs are the costs that a company incurs to produce goods, works or services. Cost planning allows you to use existing resources more efficiently, as well as predict activities for the future. Analysis - find the most costly items of expenditure and save on the production of goods.

What are costs

Download and get to work:

What will help: find out what expenses should be cut. It will tell you how to audit business processes and inventory costs, how to motivate employees to save.

What will help: prepare in Excel a report on the expenses of a group of companies in the required detail - by business units, directions, articles and periods

Variable costs change, depending on changes in production volumes. With an increase in the amount of output, variable costs will also increase, and, conversely, with a decrease in the amount of output, variable costs will also decrease.

The graph of variable costs has the following form - fig. 2.

Figure 2. variable cost schedule

At the initial stage, the growth of variable costs is directly related to the growth in the number of units of output. Gradually, the growth of variable costs slows down, which is associated with cost savings in mass production.

General costs

Together, the fixed and variable costs of production when added up are total (TC - total costs). This is the sum of items of all costs, both fixed and variable, that an organization spends to produce goods or provide services. Total costs are a variable value and depend on the amount of output (production volumes) and the cost of resources spent on production.

Graphically, the total costs (TC) look like this - fig. 3.

Figure 3. Schedule of fixed, variable and total costs

An example of calculating fixed and variable costs

The Sewing Master JSC company is engaged in tailoring and sale of clothes wholesale and retail. At the beginning of the year, the organization won a tender and signed a long-term contract for a period of 1 year - a large order for sewing overalls for medical workers in the amount of 5,000 units per year.

The organization incurred the following costs during the year (see table).

table. company costs

Type of costs	Amount, rub.
Sewing shop rental	50 000 rub. per month
Depreciation deductions according to accounting data	48 000 rub. per year
Interest on a loan for the purchase of sewing equipment and necessary materials (fabrics, threads, sewing accessories, etc.)	84 000 rub. per year
Utility bills for electricity, water supply	18 500 rub. per month
The cost of materials for tailoring workwear (fabrics, threads, buttons and other accessories)
Remuneration of workers (working staff of the workshop amounted to 12 people) with an average wage of 30,000 rubles.	360 000 rub. per month
Remuneration of administrative staff (3 people) with an average salary of 45,000 rubles.	135 000 rub. per month
sewing equipment cost

Fixed costs include:

rent for a sewing workshop;
depreciation deductions;
payment of interest on a loan for the purchase of equipment;
the cost of the sewing equipment itself;
administration salaries.

Calculation of fixed costs:

FC \u003d 50000 * 12 + 48000 + 84000 + 500000 \u003d 1,232,000 rubles per year.

Let's calculate the average fixed costs:

Variable costs include the cost of raw materials and materials, the wages of employees of the sewing workshop and the payment of utility bills.

VC \u003d 200000 + 360000 + 18500 * 12 \u003d 782,000 rubles.

Calculate average variable costs

We obtain the total costs for the production of all products by summing up the fixed and variable costs:

TC \u003d 1232000 + 782000 \u003d 20,140,00 rubles.

The average total costs are calculated by the formula:

Results

Bearing in mind that the organization has just started its sewing production (rents a workshop, purchases sewing equipment on credit, etc.), the amount of fixed costs at the initial stage of production will be quite significant. Also plays a role and the fact that the volume of production is still low - 5,000 units. Therefore, fixed costs so far prevail over variable ones.

With an increase in production, fixed costs will remain unchanged, but variables will increase.

Analysis and planning

Cost planning (both fixed and variable) allows the organization to rationally and more efficiently use available resources, as well as predict its activities for the future (concerns the short term). The analysis is also necessary in order to determine where the most costly items of expenditure are and how you can save on the production of goods.

Saving on fixed and variable costs reduces the cost of production - the organization can set a lower price for its products than before, which increases the competitiveness of products in the market and increases the attractiveness in the eyes of consumers (