Production costs are calculated based on estimate documents. If the company does not generate such documents, then accounting data for the reporting period will be required.
All costs are divided into fixed (their size remains unchanged throughout the entire period) and variable (their size will constantly change depending on the number of goods produced).
In accounting, the company's costs are reflected in the following cost accounts: 20, 23, 26, 25, 29, 21 and 28. To determine the amount of costs for the required period, it is necessary to add up the debit turnover for these accounts. The only exceptions are internal turnover and refinery residues.
Let's look at how production costs are calculated: total, average and marginal.
General costs
The formula for calculating total (total) production costs will be as follows:
Total costs = fixed costs + variable costs.
By calculating such costs, you can find out the size of the total costs for all production. Detailing is carried out by various groups: workshops, product groups, types of goods and other factors.
By analyzing dynamics, you can easily predict the level of production and sales of goods, expected profit or loss, and the need to increase production capacity.
Average costs
To calculate average costs, you must use the following formula:
Average costs = amount of total costs / number of goods produced (volume of work performed).
This indicator, like the previous one, is calculated full cost goods. Thanks to it, you can easily find out the size of the minimum price of a product, as well as establish the effectiveness of investing resources on each unit of product, and also compare the amount of costs with the price level.
Marginal cost
Marginal costs are calculated using the following formula:
Marginal cost = change in total cost / change in production level.
Marginal costs reflect the costs of producing additional items. units of goods. Thanks to the indicator of such costs, it is possible to establish the increase in costs for producing additional quantities of goods in the most profitable way. While the amount of fixed costs remains unchanged, the amount of variable costs increases.
Cost link
The size of marginal costs must always be less than the size of total average and costs (per unit of goods). If this ratio is not observed, it means that the company has violated the optimal size.
The size of average costs changes in the same way as the size of marginal costs. It is impossible to increase the quantity of manufactured goods all the time. This is evidenced by the law of diminishing returns. At a certain stage variable costs, the formula of which was given above, will reach their maximum. After reaching this critical level, an increase in the level of manufactured goods will lead to an increase in all types of costs.
Production costs are the costs of purchasing 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 ground rent and an implicit interest on the owner's equity. In other words, accounting costs are equal to economic costs 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, work force and so on.).
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. Fixed, variable and total costs are distinguished.
Fixed costs (FC) are costs whose value in the short run 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 purchasing costs raw materials, fuel, energy, transport services, wages of workers and employees, etc. In supermarkets, payment for the services of supervisors is included in variable costs, since managers can adapt 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 large quantity 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, then fixed costs marginal cost always equal to 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, wage, 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); sold products, current - assessment of sold products at restored cost; technological - the amount of costs for organizing the technological process of manufacturing products and providing services; actual - based on actual costs for all cost items for a given period.
G.S. Bechkanov, G.P. Bechkanova
2.3.1. Production costs in a market economy.
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 opportunity free access firms in the industry in the short term are 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 you reach optimal sizes production (Q 1) there is a relative saving of VC.
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. General character curve - 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 of consumer qualities; then they speak of 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 increase in the use of a factor of production, while the rest remain unchanged, sooner or later a point is reached, starting from which the additional use of variable factors leads to a decrease in the increase in production.
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 nature 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 company decides to increase production volume, but at the initial stage (ATC) 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 - a positive effect of 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 product 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 there is this enterprise resources are used more efficiently.
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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Production costs have their own classification, divided in relation to how they “behave” when production volumes change. Costs related to different types behave differently.
Fixed costs (FC, TFC)
Fixed costs, as the name suggests, is a set of enterprise costs that arise regardless of the volume of products produced. Even when the company does not produce (sell or provide services) anything at all. The abbreviation is sometimes used to denote such costs in the literature TFC (time-fixed costs). Sometimes it is used simply - FC (fixed costs).
Examples of such costs could be the monthly salary of an accountant, rent for premises, payment for land, etc.
It should be understood that fixed costs (TFC) are actually semi-fixed. To a certain extent, they are still affected by production volumes. Let's imagine that in the workshop of a machine-building enterprise a system for automatic removal of chips and waste is installed. With an increase in the volume of output, it seems that no additional costs arise. But if a certain limit is exceeded, additional equipment maintenance will be required, replacement of individual parts, cleaning, and elimination of current malfunctions that will occur more often.
Thus, in theory, fixed costs (expenses) in fact are only conditionally so. That is, the horizontal line of costs (costs) in the book is not such in practice. Let's say that it is close to some constant level.
Accordingly, in the diagram (see below), such costs are conventionally shown as a horizontal TFC graph
Variable Costs (TVC)
Variable production costs, as the name suggests, is a set of enterprise costs that directly depend on the volume of products produced. In literature this type costs are sometimes abbreviated TVC (time-variable costs). As the name suggests, " variables" - means increasing or decreasing simultaneously with changes in the volume of products produced by production.
Direct costs include, for example, raw materials and materials that are part of the final product or are consumed during the production process in direct proportion to its load. If an enterprise produces, for example, cast billets, then the consumption of the metal from which these blanks are composed will directly depend on the production program. To denote the expenditure of resources that are directly used to produce a product, the term “direct costs (costs)” is also used. These costs are also variable costs, but not all, since this concept is broader. A significant part of production costs is not directly included in the product, but varies in direct proportion to the volume of production. Such costs are, for example, energy costs.
It is necessary to take into account that a number of costs for resources that the enterprise uses must be separated for the purpose of classifying costs. For example, the electricity that is used in the heating furnaces of a metallurgical enterprise is classified as variable costs (TVC), but the other part of the electricity consumed by the same enterprise for lighting the plant territory is classified as constant costs (TFC). That is, the same resource that the enterprise consumed can be divided into parts that can be classified differently - as variable or as fixed costs.
There are also a number of costs, the costs of which are classified as conditionally variable. That is, they are related to production processes, but directly proportional dependence in relation to production volumes they do not.
In the diagram (below), the variable costs of production are shown as a TVC graph.
This graph differs from the linear one that it should be in theory. The fact is that with sufficiently small production volumes, direct production costs are higher than they should be. For example, a casting mold is designed for 4 castings, but you are producing two. The melting furnace is loaded below its design capacity. As a result, more resources are consumed than the technological standard. After exceeding a certain value of production volumes, the graph of variable costs (TVC) becomes close to linear, but then, when a certain value is exceeded, costs (in terms of unit of output) begin to rise again. This is explained by the fact that when the normal level of production capabilities of an enterprise is exceeded, more resources must be spent on the production of each additional unit of product. For example, pay employees overtime, spend more money for equipment repairs (under irrational operating conditions, repair costs grow geometrically), etc.
Thus, variable costs are considered to obey a linear schedule only conditionally, at a certain interval, within the normal production capacity of the enterprise.
Total enterprise costs (TC)
The total costs of an enterprise are the sum of variable and fixed costs. In the literature they are often referred to as TC (total costs).
That is
TC = TFC + TVC
Where costs by type:
TC - general
TFC - constant
TVC - variables
In the diagram, total costs are reflected by the TC schedule.
Average fixed costs (AFC)
Average fixed costs is called the quotient of dividing the sum of fixed costs by a unit of output. In the literature this quantity is denoted as A.F.C. (average fixed costs).
That is
AFC = TFC / Q
Where
TFC - fixed production costs (see above)
The meaning of this indicator is that it shows how many fixed costs are incurred per unit of production. Accordingly, as production volume increases, each unit of product accounts for an ever smaller share of fixed costs (AFC). Accordingly, a decrease in the amount of fixed costs per unit of product (service) of an enterprise leads to an increase in profit.
On the chart, the value of the AFC indicator is displayed by the corresponding AFC graph
Average Variable Cost (AVC)
Average variable costs called the quotient of dividing the sum of costs for the production of products (services) by their quantity (volume). They are often referred to by the abbreviation AVC(average variable costs).
AVC = TVC/Q
Where
TVC - variable production costs (see above)
Q - quantity (volume) of production
It would seem that, per unit of production, variable costs should always be the same. However, for reasons discussed earlier (see TVC), production costs fluctuate on a per-unit basis. Therefore, for approximate economic calculations, the value of average variable costs (AVC) is taken into account at volumes close to the normal capacity of the enterprise.
On the diagram, the dynamics of the AVC indicator is displayed by a graph with the same name
Average Cost (ATC)
The average cost of an enterprise is the quotient of dividing the sum of all costs of the enterprise by the amount of products (work, services) produced. This quantity is often denoted as ATC (average total costs). The term “full unit cost” is also used.
ATC = TC/Q
Where
TC - total (total) costs (see above)
Q - quantity (volume) of production
It should be noted that given value suitable only for very rough calculations, calculations with minor deviations in production values or with an insignificant share of fixed costs in the total costs of the enterprise.
With an increase in production volumes, the estimated value of costs (TC), obtained based on the values of the ATC indicator and multiplied by the production volume, other than the calculated one, will be greater than the actual value (costs will be overestimated), and if they decrease, on the contrary, they will be underestimated. This will occur due to the influence of semi-fixed costs (TFC). Since TC = TFC + TVC, then
ATC = TC/Q
ATC = (TFC + TVC) / Q
Thus, when production volumes change, the value of fixed costs (TFC) will not change, which will lead to the error described above.
Dependence of types of costs on production level
The graphs show the dynamics of values various types costs depending on production volumes at the enterprise.
Marginal Cost (MC)
Marginal cost is the amount of additional costs required to produce each additional unit of output.
MC = (TC 2 - TC 1) / (Q 2 - Q 1)
The term "marginal cost" (in the literature is often referred to as MC - marginal costs) is not always correctly perceived, since it was the result of a not entirely correct translation English word margin. In Russian, “ultimate” often means “striving for the maximum,” whereas in this context it should be understood as “being within the boundaries.” Therefore, authors who know English language(let’s smile here), instead of the word “marginal” they use the term “marginal costs” or even just “marginal costs”.
From the above formula it is easy to see that MC for each additional unit of production will be equal to AVC on the interval [Q 1; Q 2].
Since TC = TFC + TVC, then
MC = (TC 2 - TC 1) / (Q 2 - Q 1)
MC = (TFC + TVC 2 - TFC - TVC 1) / (Q 2 - Q 1)
MC = (TVC 2 - TVC 1) / (Q 2 - Q 1)
That is, marginal (marginal) costs are exactly equal to the variable costs necessary to produce additional products.
If we need to calculate MC for a specific production volume, then we assume that the interval we are dealing with is equal to [ 0; Q ] (that is, from zero to the current volume), then at the “point zero” variable costs are equal to zero, production is also equal to zero and the formula simplifies to the following form:
MC = (TVC 2 - TVC 1) / (Q 2 - Q 1)
MC = TVC Q/Q
Where
TVC Q is the variable costs required to produce Q units of output.
Note. You can evaluate the dynamics of various types of costs using technical
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
Permanent
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 others.
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 in free space in warehouses and additional maintenance of mechanisms that wear out faster.
Often in the literature, economists more often use the term “conditionally fixed production costs.”
Variables
Unlike fixed costs, they depend directly on the volume of products produced.
This type includes raw materials, supplies, 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.
The same costs can be of different types
Moreover, the same costs can be of 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 refers to 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.
Total production costs
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 the volume of production and management processes at the enterprise.
Average production costs
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 this indicator in economic analysis, you can understand how effectively 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.
Marginal cost
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.