Every organization strives to achieve maximum profit. Any production incurs costs for the purchase of factors of production. At the same time, the organization strives to achieve such a level that a given volume of production is provided at the lowest possible cost. The firm cannot influence the prices of resources. But, knowing the dependence of production volumes on the number of variable costs, costs can be calculated. Cost formulas will be presented below.
From an organizational point of view, expenses are divided into the following groups:
The second group is further divided into several elements.
Before studying how costs and cost formulas are calculated, let's look at the basic terms.
Total costs (TC) are the total costs of producing a certain volume of products. In the short term, a number of factors (for example, capital) do not change, and some costs do not depend on output volumes. This is called total fixed costs (TFC). The amount of costs that changes with output is called total variable costs (TVC). How to calculate total costs? Formula:
Fixed costs, the calculation formula for which will be presented below, include: interest on loans, depreciation, insurance premiums, rent, salary. Even if the organization does not work, it must pay rent and loan debt. Variable expenses include salaries, costs of purchasing materials, paying for electricity, etc.
With an increase in output volumes, variable production costs, the calculation formulas for which were presented earlier:
Wanting to maximize profits, the organization seeks to reduce costs per unit of product. This ratio shows a parameter such as (ATC) average cost. Formula:
ATC = TC\Q.
ATC = AFC + AVC.
The change in total costs when production volume increases or decreases by one unit shows marginal costs. Formula:
WITH economic point From a perspective, marginal costs are very important in determining the behavior of an organization in market conditions.
Marginal cost must be less than total average cost (per unit). Failure to comply with this ratio indicates a violation of the optimal size of the enterprise. Average costs will change in the same way as marginal costs. It is impossible to constantly increase production volume. This is the law of diminishing returns. At a certain level, variable costs, the calculation formula for which was presented earlier, will reach their maximum. After this critical level, an increase in production volumes even by one will lead to an increase in all types of costs.
Having information about the volume of production and the level fixed costs, everything can be calculated existing species costs.
Issue, Q, pcs. | Total costs, TC in rubles | ||||||
Without engaging in production, the organization incurs fixed costs of 60 thousand rubles.
Variable costs are calculated using the formula: VC = TC - FC.
If the organization is not engaged in production, the amount variable expenses will be equal to zero. With an increase in production by 1 piece, VC will be: 130 - 60 = 70 rubles, etc.
Marginal costs are calculated using the formula:
MC = ΔTC / 1 = ΔTC = TC(n) - TC(n-1).
The denominator of the fraction is 1, since each time the volume of production increases by 1 piece. All other costs are calculated using standard formulas.
Accounting expenses are the cost of the resources used in their purchase prices. They are also called explicit. The amount of these costs can always be calculated and justified with a specific document. These include:
Economic costs are the cost of other assets that could be obtained from alternative uses of resources. Economic costs = Explicit + Implicit costs. These two types of expenses most often do not coincide.
Implicit costs include payments that a firm could receive if it used its resources more profitably. If they were bought in a competitive market, their price would be the best among the alternatives. But pricing is influenced by the state and market imperfections. Therefore, the market price may not reflect the true cost of the resource and may be higher or lower than the opportunity cost. Let us analyze in more detail the economic costs and cost formulas.
An entrepreneur, working for himself, receives a certain profit from his activities. If the sum of all expenses incurred is higher than the income received, then the entrepreneur ultimately suffers a net loss. It, together with net profit, is recorded in documents and refers to explicit costs. If an entrepreneur worked from home and received an income that exceeded his net profit, then the difference between these values would constitute implicit costs. For example, an entrepreneur receives a net profit of 15 thousand rubles, and if he were employed, he would have 20,000. in this case there are implicit costs. Cost formulas:
NI = Salary - Net profit = 20 - 15 = 5 thousand rubles.
Another example: an organization uses in its activities premises that belong to it by right of ownership. Explicit expenses in this case include the amount of utility costs (for example, 2 thousand rubles). If the organization rented out this premises, it would receive an income of 2.5 thousand rubles. It is clear that in this case the company would also pay utility bills monthly. But she would also receive net income. There are implicit costs here. Cost formulas:
NI = Rent - Utilities = 2.5 - 2 = 0.5 thousand rubles.
The cost for an organization to enter and exit a market is called sunk costs. No one will return the costs of registering an enterprise, obtaining a license, or paying for an advertising campaign, even if the company ceases operations. In a narrower sense, sunk costs include costs for resources that cannot be used in alternative ways, such as the purchase of specialized equipment. This category of expenses does not relate to economic costs and does not affect Current state companies.
If the organization's average costs are market price, then the firm earns zero profit. If favorable conditions increase the price, the organization makes a profit. If the price corresponds to the minimum average cost, then the question arises about the feasibility of production. If the price does not cover even the minimum variable costs, then the losses from the liquidation of the company will be less than from its functioning.
The world economy is based on MRT - the specialization of countries in the production of certain types of goods. This is the basis of any type of cooperation between all states of the world. The essence of MRI is revealed in its division and unification.
One manufacturing process cannot be divided into several separate ones. At the same time, such a division will make it possible to unite separate industries and territorial complexes and establish interconnections between countries. This is the essence of MRI. It is based on cost-effective specialization individual countries in the production of certain types of goods and the exchange of them in quantitative and qualitative ratios.
The following factors encourage countries to participate in MRI:
Each participant finds economic benefit in the process itself.
In the previous paragraph, in search of the optimal combination of factors of production, the firm could change both labor and capital. However, in practice, it is much easier for a company to hire additional workers than to purchase new equipment - capital. The latter requires more time. In this regard, in production theory, a distinction is made between short and long periods.
In the long run, a firm can change all factors of production to increase output. In the short run, some factors of production are variable, while others are constant. Here, to increase output, the firm can measure only variable factors. Prices for factors of production in the short run are assumed to be fixed. It follows that all costs of a company in a short period can be divided into constant and variable.
Fixed costs(FC) are costs whose value does not change together with a change in output volume, i.e. These are the costs of fixed factors of production. Typically fixed costs include depreciation, rent, interest on loans, wage management and office employees, etc. Fixed costs usually include implicit costs.
Variable costs(VC) are costs whose value is changing together with a change in output volume, i.e. These are the costs of variable factors of production. These usually include wages of production workers, costs of raw materials and materials, electricity for technological purposes, etc.
In theoretical microeconomic models, variable costs usually include labor costs, and fixed costs usually include capital costs. From this point of view, the value of variable costs is equal to the product of the price of one man-hour of labor (PL) by the number of man-hours (L):
In turn, the value of fixed costs is equal to the product of the price of one machine-hour of capital (PK) by the number of machine-hours (K):
The sum of fixed and variable costs gives us total costs(TC):
F.C.+ V.C.= TC
In addition to total costs, you also need to know average costs.
Average fixed costs(AFC) are fixed costs per unit of output:
Average Variable Costs(AVC) are variable costs per unit of output:
Average total costs(AC) is the total costs per unit of output or the sum of average fixed and average variable costs:
When analyzing a firm's market behavior, marginal costs play an important role. Marginal Cost(MC) reflect the increase in total costs with an increase in output (q) by one unit:
Since only variable costs increase with output growth, the increment in total costs is equal to the increment in variable costs (DTC=DVC). We can therefore write:
You can put it this way: marginal costs are the costs associated with producing the last unit of output.
Let's give an example of cost calculation. Let there be 10 units upon release. variable costs are 100, and at output 11 units. they reach 105. Fixed costs do not depend on output and are equal to 50. Then:
In our example, output increased by 1 unit. (Dq=1), while variable and total costs increased by 5 (DVC=DTC=5). Consequently, an additional unit of output required an increase in costs by 5. This is the marginal cost of producing the eleventh unit of output (MC = 5).
If the total (variable) cost function is continuous and differentiable, then the marginal costs for a given volume of output can be determined by taking the derivative of this function with respect to output:
or 
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When we looked at the periods of production of a firm, we said that in the short run the firm can change not all the factors of production used, while in the long run all factors are variable.
It is precisely these differences in the possibility of changing the volume of resources when changing production volumes that forced economists to divide all types of costs into two categories:
Fixed costs(FC, fixed cost) are those costs that cannot be changed in the short term, and therefore they remain the same with small changes in the volume of production of goods or services. Fixed costs include, for example, rent for premises, costs associated with maintaining equipment, payments to repay previously received loans, as well as all kinds of administrative and other overhead costs. Let's say it is impossible to build a new oil refining plant within a month. Therefore, if next month an oil company plans to produce 5% more gasoline, then this is only possible on existing production facilities and with existing equipment. In this case, a 5% increase in output will not lead to an increase in equipment maintenance and maintenance costs. production premises. These costs will remain constant. Only the amounts of wages paid, as well as the costs of materials and electricity (variable costs) will change.
The fixed cost graph is a horizontal line.
Average fixed costs (AFC, average fixed cost) are fixed costs per unit of output.
Variable costs(VC, variable cost) are those costs that can be changed in the short term, and therefore they grow (decrease) with any increase (decrease) in production volumes. This category includes costs for materials, energy, components, and wages.
Variable costs show the following dynamics depending on the volume of production: up to a certain point they increase at a killing pace, then they begin to increase at an increasing pace.
The variable cost schedule looks like this:
Average variable costs (AVC, average variable cost) are variable costs per unit of output.
The standard Average Variable Cost graph looks like a parabola.
The sum of fixed costs and variable costs is total costs (TC, total cost)
TC = VC + FC
Average total costs (AC, average cost) are the total costs per unit of production.
Also, average total costs are equal to the sum of average fixed and average variable costs.
AC = AFC + AVC
AC graph looks like a parabola
A special place in economic analysis occupy marginal costs. Marginal cost is important because economic decisions typically involve marginal analysis of available alternatives.
Marginal cost (MC, marginal cost) is the increment in total costs when producing an additional unit of output.
Since fixed costs do not affect the increment in total costs, marginal costs are also an increment in variable costs when producing an additional unit of output.
As we have already said, formulas with derivatives in economic problems are used when smooth functions are given, from which it is possible to calculate derivatives. When we are given individual points (discrete case), then we should use formulas with increment ratios.
The marginal cost graph is also a parabola.
Let's draw a graph of marginal costs together with graphs of average variables and average total costs:
The above graph shows that AC always exceeds AVC since AC = AVC + AFC, but the distance between them decreases as Q increases (since AFC is a monotonically decreasing function).
The graph also shows that the MC graph intersects the AVC and AC graphs at their minimum points. To justify why this is so, it is enough to recall the relationship between average and maximum values already familiar to us (from the “Products” section): when the maximum value is below the average, then the average value decreases with increasing volume. When the marginal value is higher than the average value, the average value increases with increasing volume. Thus, when the marginal value crosses the average value from bottom to top, the average value reaches a minimum.
Now let’s try to correlate the graphs of general, average, and maximum values:
These graphs show the following patterns.
In this article you will learn about costs, cost formulas, and also understand the meaning of dividing them into different types.
Costs are those monetary resources that must be spent to implement economic activity. By analyzing costs (cost formulas are given below), we can draw a conclusion about the effectiveness of an enterprise’s management of its resources.
Such production costs are divided into several types, depending on how they are affected by changes
Fixed costs mean those costs whose value is not affected by the volume of products produced. That is, their value will be the same as when the enterprise is operating in enhanced mode, fully using production capacity, or, conversely, during production downtime.
For example, such costs may be administrative or some individual items from the amount (office rent, costs of maintaining engineering and technical personnel not related to the production process), employee wages, contributions to insurance funds, license costs, software and other.
It is worth noting that in fact such costs cannot be called absolutely constant. Still, the volume of production can influence them, although not directly, but indirectly. For example, an increase in the volume of output may require an increase free space in warehouses, additional maintenance of mechanisms that wear out faster.
Often in the literature, economists more often use the term “conditionally fixed production costs.”
Unlike fixed costs, they depend directly on the volume of products produced.
IN this type can include raw materials, materials, other resources that are involved in the process and many other types of costs. For example, with an increase in production wooden boxes for 100 units, it is necessary to purchase the appropriate amount of material from which they will be produced.
Moreover, the same costs may relate to different types, and, accordingly, these will be different costs. The cost formulas by which such costs can be calculated absolutely confirm this fact.
Let's take electricity, for example. Light lamps, air conditioners, fans, computers - all this equipment that is installed in the office runs on electricity. Mechanical equipment, machines and other equipment that is involved in the production process of goods and products also consume electricity.
At the same time, in financial analysis, electricity is clearly divided and classified as different types of costs. Because to carry out correct forecasting of future costs, as well as accounting, a clear separation of processes depending on the intensity of production is necessary.
The sum of the variables is called “total costs”. The calculation formula is as follows:
Io = Ip + Iper,
Io - total costs;
IP - fixed costs;
Iper - variable costs.
Using this indicator, it is determined general level costs. Its analysis in dynamics allows you to see the processes of optimization, restructuring, reduction or increase in production volumes and management processes at the enterprise.
By dividing the sum of all costs per unit of output, you can find out the average cost. The calculation formula is as follows:
Is = Io / Op,
Is - average costs;
Op is the volume of products produced.
This indicator is also called “the total cost of one unit of production.” Using such an indicator in economic analysis, you can understand how efficiently an enterprise uses its resources to produce products. In contrast to general costs, average costs, the calculation formula for which is given above, show the efficiency of financing per 1 unit of production.
To analyze the feasibility of changing the quantity of products produced, an indicator is used that reflects production costs per one additional unit. It's called marginal cost. The calculation formula is as follows:
Ipr = (Io2 - Io1) / (Op2 - Op1),
YPR - marginal cost.
This calculation will be very useful if the management staff of the enterprise has decided to increase production volumes, expand and other changes in production processes.
So, after you have learned about costs and cost formulas, it becomes clear why in economic analysis costs are clearly divided into basic production, administrative and managerial, and general production costs.
Production costs – This is the monetary cost of purchasing the factors of production used. Most cost effective method production is considered to be one in which production costs are minimized. Production costs are measured in value terms based on the costs incurred.
Production costs – costs that are directly associated with the production of goods.
Distribution costs – costs associated with the sale of manufactured products.
The economic essence of costs is based on the problem of limited resources and alternative use, i.e. the use of resources in this production excludes the possibility of using it for another purpose.
The task of economists is to choose the most optimal option for using factors of production and minimizing costs.
Internal (implicit) costs – These are monetary incomes that the company donates, independently using its resources, i.e. These are the income that could be received by the company for independently used resources under the best of conditions. possible ways their applications. Opportunity cost is the amount of money required to divert a particular resource from the production of good B and use it to produce good A.
Thus, the costs in cash that the company incurred in favor of suppliers (labor, services, fuel, raw materials) are called external (explicit) costs.
Dividing costs into explicit and implicit are two approaches to understanding the nature of costs.
1. Accounting approach: Production costs should include all real, actual expenses in cash (salaries, rent, alternative costs, raw materials, fuel, depreciation, social contributions).
2. Economic approach: production costs should include not only actual costs in cash, but also unpaid costs; associated with missed opportunities for the most optimal use of these resources.
Short term(SR) is the period of time during which some factors of production are constant and others are variable.
Constant factors – general dimensions buildings, structures, number of machines and equipment, number of firms operating in the industry. Therefore, the possibility of free access of firms to the industry in the short term is limited. Variables – raw materials, number of workers.
Long term(LR) – the period of time during which all factors of production are variable. Those. During this period, you can change the size of buildings, equipment, and the number of companies. During this period, the company can change all production parameters.
Classification of costs
Fixed costs (F.C.) – costs, the value of which in the short term does not change with an increase or decrease in production volume, i.e. they do not depend on the volume of products produced.
Example: building rent, equipment maintenance, administration salary.
C is the amount of costs.
The fixed cost graph is a straight line parallel to the OX axis.
Average fixed costs (A F C) – fixed costs that fall on a unit of output and are determined by the formula: A.F.C. = F.C./ Q
As Q increases, they decrease. This is called overhead allocation. They serve as an incentive for the company to increase production.
The graph of average fixed costs is a curve that has a decreasing character, because As production volume increases, total revenue increases, then average fixed costs represent an increasingly smaller value per unit of product.
Variable costs (V.C.) – costs, the value of which changes depending on the increase or decrease in production volume, i.e. they depend on the volume of products produced.
Example: costs of raw materials, electricity, auxiliary materials, wages (workers). The main share of costs is associated with the use of capital.
The graph is a curve proportional to the volume of output and increasing in nature. But her character can change. In the initial period, variable costs grow at a higher rate than manufactured products. As the optimal production size (Q 1) is achieved, relative savings in VC occur.
Average variable costs (AVC) – the volume of variable costs that falls on a unit of output. They are determined by the following formula: by dividing VC by the volume of output: AVC = VC/Q. First the curve falls, then it is horizontal and increases sharply.
A graph is a curve that does not start at the origin. The general nature of the curve is increasing. The technologically optimal output size is achieved when AVCs become minimal (i.e. Q – 1).
Total costs (TC or C) – the totality of a firm's fixed and variable costs associated with producing products in the short term. They are determined by the formula: TC = FC + VC
Another formula (function of the volume of production output): TC = f (Q).
Depreciation and amortization
Wear- This is the gradual loss of capital resources of their value.
Physical deterioration– loss of the consumer qualities of the means of labor, i.e. technical and production properties.
A decrease in the value of capital goods may not be associated with their loss consumer qualities, then they talk about obsolescence. It is due to an increase in the efficiency of production of capital goods, i.e. the emergence of similar, but cheaper new means of labor that perform similar functions, but are more advanced.
Obsolescence is a consequence of scientific and technological progress, but for the company this results in increased costs. Obsolescence refers to changes in fixed costs. Physical wear and tear is a variable cost. Capital goods last more than one year. Their cost is transferred to finished products gradually as it wears out - this is called depreciation. Part of the revenue for depreciation is formed in the depreciation fund.
Depreciation deductions:
Reflect an assessment of the amount of depreciation of capital resources, i.e. are one of the cost items;
Serves as a source of reproduction of capital goods.
The state legislates depreciation rates, i.e. the percentage of the value of capital goods by which they are considered to be worn out during the year. It shows how many years the cost of fixed assets must be reimbursed.
Average Total Cost (ATC) – the sum of the total costs per unit of production output:
ATS = TC/Q = (FC + VC)/Q = (FC/Q) + (VC/Q)
The curve is V-shaped. The production volume corresponding to the minimum average total cost is called the point of technological optimism.
Marginal Cost (MC) – an increase in total costs caused by an increase in production by the next unit of output.
Determined by the following formula: MS = ∆TC/ ∆Q.
It can be seen that fixed costs do not affect the value of MS. And MC depends on the increment of VC associated with an increase or decrease in production volume (Q).
Marginal cost shows how much it would cost the firm to increase output per unit. They decisively influence the firm’s choice of production volume, because This is exactly the indicator that the company can influence.
The graph is similar to AVC. The MC curve intersects the ATC curve at the point corresponding to the minimum value of total costs.
In the short run, the company's costs are fixed and variable. This follows from the fact that the company's production capacity remains unchanged and the dynamics of indicators is determined by the increase in equipment utilization.
Based on this graph, you can build a new graph. Which allows you to visualize the company’s capabilities, maximize profits and view the boundaries of the company’s existence in general.
For making a firm's decision, the most important characteristic is the average value; average fixed costs fall as production volume increases.
Therefore, the dependence of variable costs on the production growth function is considered.
At stage I, average variable costs decrease and then begin to grow under the influence of economies of scale. During this period, it is necessary to determine the break-even point of production (TB).
TB is the level of physical sales volume over an estimated period of time at which revenue from product sales coincides with production costs.
Point A – TB, at which revenue (TR) = TC
Restrictions that must be observed when calculating TB
1. The volume of production is equal to the volume of sales.
2. Fixed costs are the same for any volume of production.
3. Variable costs change in proportion to the volume of production.
4. The price does not change during the period for which the TB is determined.
5. The price of a unit of production and the cost of a unit of resources remain constant.
Law of Diminishing Marginal Returns is not absolute, but relative in nature and it operates only in the short term, when at least one of the factors of production remains unchanged.
Law: with the growth of someone’s use of a factor of production, with the rest remaining unchanged, sooner or later a point is reached, starting from which additional use variable factors leads to a decrease in production growth.
The operation of this law presupposes the unchanged state of technical and technological production. And therefore, technological progress can change the scope of this law.
The long-run period is characterized by the fact that the firm is able to change all the factors of production used. During this period variable character of all used production factors allows the company to use the most optimal combinations of them. This will affect the magnitude and dynamics of average costs (costs per unit of production). If a firm decides to increase production volume, but by initial stage(ATS) will first decrease, and then, when more and more new capacities are involved in production, they will begin to increase.
The graph of long-term total costs shows seven different options (1 – 7) for the behavior of ATS in short-term periods, because The long-term period is the sum of the short-term periods.
The long-run cost curve consists of options called stages of growth. In each stage (I – III) the company operates in the short term. The dynamics of the long-run cost curve can be explained using economies of scale. The company changes the parameters of its activities, i.e. the transition from one type of enterprise size to another is called change in scale of production.
I – in this time interval, long-term costs decrease with an increase in the volume of output, i.e. there are economies of scale – positive effect scale (from 0 to Q 1).
II – (this is from Q 1 to Q 2), at this time interval of production, the long-term ATS does not react to an increase in production volume, i.e. remains unchanged. And the firm will have a constant effect from changes in the scale of production (constant returns to scale).
III – long-term ATC increases with an increase in output and there is damage from an increase in the scale of production or diseconomies of scale(from Q 2 to Q 3).
3. IN general view profit is defined as the difference between total revenue and total costs for a certain period of time:
SP = TR –TS
TR ( total revenue) - the amount of cash received by a company from the sale of a certain amount of goods:
TR = P* Q
AR(average revenue) is the amount of cash receipts per unit of products sold.
Average revenue is equal to the market price:
AR = TR/ Q = PQ/ Q = P
M.R.(marginal revenue) is the increase in revenue that arises from the sale of the next unit of production. Under perfect competition, it is equal to the market price:
M.R. = ∆ TR/∆ Q = ∆(PQ) /∆ Q =∆ P
In connection with the classification of costs into external (explicit) and internal (implicit), different concepts of profit are assumed.
Explicit costs (external) are determined by the amount of expenses of the enterprise to pay for purchased factors of production from outside.
Implicit costs (internal) determined by the cost of resources owned by a given enterprise.
If we subtract external costs from total revenue, we get accounting profit - takes into account external costs, but does not take into account internal ones.
If internal costs are subtracted from accounting profit, we get economic profit.
Unlike accounting profit, economic profit takes into account both external and internal costs.
Normal profit appears when the total revenue of an enterprise or firm is equal to total costs, calculated as alternative costs. The minimum level of profitability is when it is profitable for an entrepreneur to run a business. “0” - zero economic profit.
Economic profit(clean) – its presence means that resources are used more efficiently at a given enterprise.
Accounting profit exceeds the economic value by the amount of implicit costs. Economic profit serves as a criterion for the success of an enterprise.
Its presence or absence is an incentive to attract additional resources or transfer them to other areas of use.
The company's goals are to maximize profit, which is the difference between total revenue and total costs. Since both costs and income are a function of production volume, the main problem for the company becomes determining the optimal (best) production volume. A firm will maximize profit at the level of output at which the difference between total revenue and total cost is greatest, or at the level at which marginal revenue equals marginal cost. If the firm's losses are less than its fixed costs, then the firm should continue to operate (in the short term); if the losses are greater than its fixed costs, then the firm should stop production.
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