Production costs: fixed and variable. Variable and fixed costs of the enterprise in examples and explanations Variable and fixed costs of the company

There are several cost classifications enterprises: accounting and economic, explicit and implicit, permanent, variable and gross, returnable and non-returnable, etc.

Let's dwell on one of them, according to which all costs can be divided into fixed and variable. At the same time, it should be understood that such a division is possible only in the short term, since over long time periods all costs can be attributed to variables.

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What are fixed costs of production

Fixed costs are costs that a firm incurs whether or not it produces a product. This type of cost does not depend on the volume of products or services provided. Alternative names for these costs are overhead or sunk costs. The company ceases to bear this type of cost only in the event of liquidation.

Fixed Costs: Examples

Fixed costs in the short run can include the following types of expenses of the enterprise:

However, when calculating the average value fixed costs (this is the ratio of fixed costs to the volume of output), the amount of such costs per unit of output will be the lower, the greater the volume of production.

Variable and total costs

In addition, the company also has variable costs - this is the cost of raw materials and inventory, which are fully used within each production cycle. They are called variables because the amount of such costs is directly dependent on the volume of output.

Value fixed and variable costs during one production cycle is called gross or total costs. The whole set of expenses incurred by the enterprise that affect the cost of a unit of output is called the cost of production.

These indicators are necessary for financial analysis activities of the company, calculation of its effectiveness, search for the possibility of reducing the cost of products manufactured by the enterprise, increasing the competitiveness of the organization.

Reducing average fixed costs can be achieved by increasing the volume of products or services provided. The lower this indicator, the lower the cost of products (services) and the higher the profitability of the company.

In addition, the division into fixed and variable costs is very conditional. At different times, using different approaches to their classification, costs can be classified as both fixed and variable. Most often, the management of the enterprise itself decides which costs to attribute to variable or overhead costs.

Examples of costs that can be attributed to one or the other type of costs are:

Each enterprise incurs certain costs in the course of its activities. There are different ones. One of them provides for the division of costs into fixed and variable.

The concept of variable costs

Variable costs are those costs that are directly proportional to the volume of products and services produced. If the company produces bakery products, then as an example of variable costs for such an enterprise, we can cite the consumption of flour, salt, yeast. These costs will grow in proportion to the growth in the volume of bakery products.

One cost item can relate to both variable and fixed costs. For example, the cost of electricity for industrial ovens that bake bread would serve as an example of variable costs. And electricity costs for lighting production building- this is fixed costs.

There is also such a thing as conditionally variable costs. They are related to production volumes, but to a certain extent. With a small level of production, some costs still do not decrease. If the production furnace is loaded halfway, then the same amount of electricity is consumed as for a full furnace. That is, in this case, with a decrease in production, costs do not decrease. But with an increase in output above a certain value, costs will increase.

Main types of variable costs

Let's give examples of variable costs of the enterprise:

• Wages of employees, which depends on the volume of products they produce. For example, in the bakery industry, a baker, a packer, if they have piecework wages. And also here you can include bonuses and remuneration to sales specialists for specific volumes of products sold.
• The cost of raw materials, materials. In our example, these are flour, yeast, sugar, salt, raisins, eggs, etc., packaging materials, bags, boxes, labels.
• are the cost of fuel and electricity, which is spent on the production process. It can be natural gas, gasoline. It all depends on the specifics of a particular production.
• Another typical example of variable costs are taxes paid on the basis of production volumes. These are excises, taxes on tax), USN (Simplified Taxation System).
• Another example of variable costs is paying for the services of other companies, if the volume of use of these services is related to the level of production of the organization. It can be transport companies, intermediary firms.

Variable costs are divided into direct and indirect

This separation exists due to the fact that different variable costs are included in the cost of goods in different ways.

Direct costs are immediately included in the cost of goods.

Indirect costs are allocated to the entire volume of goods produced in accordance with a certain base.

Average variable costs

This indicator is calculated by dividing all variable costs by the volume of production. Average variable costs can both decrease and increase as production volumes increase.

Consider the example of average variable costs in a bakery. Variable costs for the month amounted to 4600 rubles, 212 tons of products were produced. Thus, the average variable costs will amount to 21.70 rubles / ton.

The concept and structure of fixed costs

They cannot be reduced in a short amount of time. With a decrease or increase in output, these costs will not change.

Fixed costs of production usually include the following:

• rent for premises, shops, warehouses;
• utility bills;
• administration salary;
• fuel costs energetic resources, which are consumed not by production equipment, but for lighting, heating, transport, etc.;
• advertising expenses;
• payment of interest on bank loans;
• purchase of stationery, paper;
• costs for drinking water, tea, coffee for employees of the organization.

Gross costs

All of the above examples of fixed and variable costs add up to gross, that is, the total costs of the organization. As production volumes increase, gross costs increase in terms of variable costs.

All costs, in fact, are payments for the acquired resources - labor, materials, fuel, etc. The profitability indicator is calculated using the sum of fixed and variable costs. An example of calculating the profitability of the main activity: divide the profit by the amount of costs. Profitability shows the effectiveness of the organization. The higher the profitability, the better the organization performs. If the profitability is below zero, then the costs exceed the income, that is, the organization's activities are inefficient.

Enterprise Cost Management

It is important to understand the essence of variable and fixed costs. With proper management of costs in the enterprise, their level can be reduced and more profit can be obtained. Fixed costs are almost impossible to reduce, so efficient work to reduce costs can be carried out in terms of variable costs.

How can you reduce costs in your business?

Each organization works differently, but basically there are following directions cost reduction:

1. Reducing labor costs. It is necessary to consider the issue of optimizing the number of employees, tightening production standards. Some employee can be reduced, and his duties can be distributed among the rest with the implementation of his additional payment for extra work. If the enterprise is growing production volumes and it becomes necessary to hire additional people, then you can go by revising production standards and or increasing the amount of work in relation to old workers.

2. Raw materials are an important part of variable costs. Examples of their abbreviations might be as follows:

• search for other suppliers or changing the terms of supply by old suppliers;
• introduction of modern economical resource-saving processes, technologies, equipment;

• cessation of the use of expensive raw materials or materials or their replacement with cheap analogues;
• implementation of joint purchases of raw materials with other buyers from one supplier;
• independent production of some components used in production.

3. Reducing production costs.

This may be the selection of other options for rental payments, the sublease of space.

It also includes savings on utility bills for which it is necessary to carefully use electricity, water, heat.

Savings on the repair and maintenance of equipment, vehicles, premises, buildings. It is necessary to consider whether it is possible to postpone repairs or maintenance, whether it is possible to find new contractors for this purpose, or whether it is cheaper to do it yourself.

It is also necessary to pay attention to the fact that it can be more profitable and economical to narrow down production, transfer some side functions to another manufacturer. Or vice versa, enlarge production and carry out some functions independently, refusing to cooperate with subcontractors.

Other areas of cost reduction could be organization transportation, Advertising activity, reducing the tax burden, paying off debts.

Any business must consider its costs. Working to reduce them will bring more profit and increase the efficiency of the organization.

Any firm functions for the sake of generating income, and its work is impossible without the funds spent. Exist different kinds such expenses. There are activities for which constant investments of finance are required. But some of the costs are not regular, and their impact on the course of the product and its sale must also be taken into account.

So, the main meaning of the work of any company is to release a product and receive income from it. In order to start this activity, one must first acquire raw materials, tools of production, and hire labor. Certain finances are spent on this, in economics they are called costs.

People invest in production activities with a variety of purposes. Accordingly, the classification of expenses was adopted. Categories of costs (depending on properties):

• Explicit. Such costs are made directly, for the payment of wages to employees, commissions to other organizations, payment for the activities of banks and transport.
• Implicit. Costs for the needs of company executives that are not specified in the contracts.
• Permanent. The means by which continuous production processes.
• Variables. Costs that can easily be adjusted while maintaining the same level of output.
• Irrevocable. Expenses of movable assets that are invested in the activities of the company free of charge. They are characteristic of the initial period of production or re-profiling of the organization. These funds can no longer be spent on other organizations.
• Medium. Costs obtained in the course of calculations, characterizing investments in each unit of the product. This indicator contributes to the pricing of goods.
• Limit. This is the largest cost that cannot be increased due to the low efficiency of capital investments in the company.
• Appeals. The cost of delivering goods from the producer to the consumer.

Application of fixed and variable costs

Consider the differences between fixed costs and variable costs, their economic characteristics.

The first type of costs (fixed) is designed for investments in the manufacture of a product in a single production cycle. In each organization, their size is individual, so the enterprise considers them separately, taking into account the analysis of the release process. Note that such costs will not differ from the initial production stage to the sale of products to the consumer.

The second type of costs (variables) changes in each production cycle, practically without repetition of this indicator.

The two types of costs together make up the total costs, which are calculated at the end of the production process.

Simply put, Fixed costs are those that do not change over time. What can be attributed to them?

1. payment utilities;
2. The cost of operating the premises;
3. payment of rent;
4. The salary of the staff;

It must be taken into account that the constant level of total costs used in a specific time period of production, during one cycle, refers only to the total number of units of goods produced. If we calculate such costs for each unit, their size will decrease in accordance with the growth in output. This fact applies to all types of production.

Variable costs are proportional to the variable quantity or volume of the product produced.. These include:

1. Energy costs;
2. Material costs;
3. Contractual wages.

This type of cost is closely related to the volume of output of the product, as a result of which it changes according to the indicators of the production of this product.

Cost examples:

Each production cycle corresponds to a specific amount of costs that remain unchanged under any conditions. There are other costs that depend on production resources. As previously stated, costs over a short period of time are variable and fixed.

For a long time, such characteristics are not suitable, because. costs will change in this case.

Fixed Cost Examples

Fixed costs remain at the same level for any volume of output of the product, in a small time period. This is the cost of stable factors of the company, not proportional to the number of units of goods. Examples of such expenses are:

• payment of interest on a bank loan;
• depreciation expenses;
• payment of interest on bonds;
• salary for managers at the enterprise;
• insurance costs.

All costs, independent of the production of a product, which are unchanged in a short period of the production cycle, can be called constant.

Variable Cost Examples

Variable costs, on the other hand, are essentially investments in the production of goods, and therefore depend on its volume. The amount of investment is directly proportional to the amount of goods produced. Examples would be spending on:

• on stocks of raw materials;
• payment of bonuses to employees producing products;
• delivery of materials and the product itself;
• energetic resources;
• equipment;
• other expenses for the production of goods or the provision of services.

Consider a graph of variable costs, which is a curve. (Figure 1.)

Fig.1 - variable cost schedule

The path of this line from the origin to point A depicts an increase in costs with an increase in the quantity of goods produced. Section AB: more rapid increase in costs under conditions mass production. Variable costs may be affected by disproportionate costs of transport services or expendable materials, improper use of a released product with a reduced demand for it.

Example of calculating production costs:

Consider the calculation of fixed and variable costs on a specific example. Let's say a shoe company produces 2,000 pairs of boots in a year. During this time, the factory spends funds on the following needs:

• rent - 25,000 rubles;
• interest on a bank loan - 11,000 rubles;
• payment for the production of one pair of shoes - 20 rubles;
• raw materials for the production of a pair of boots - 12 p.

Our task: to calculate the variable, fixed costs, as well as the funds spent on each pair of shoes.

In this case, only rent and loan payments can be called fixed costs. Such costs are unchanged, depending on production volumes, so it is easy to calculate them: 25,000 + 11,000 = 36,000 rubles.

The cost of producing one pair of shoes is variable costs: 20+12=32 rubles.

Consequently, the annual variable costs are calculated as follows: 2000*32=64000 rubles.

General costs- this is the sum of variables and constants: 36,000 + 64,000 \u003d 100,000 rubles.

Average total cost per pair of shoes: 100,000/20=50

Production cost planning

It is important for every company to correctly calculate, plan and analyze production costs.

In the process of cost analysis, options are considered for the economical use of finance that is invested in production and should be distributed correctly. This leads to a decrease in the cost, and hence the final price of the manufactured goods, as well as an increase in the competitiveness of the company and an increase in its income.

The task of each company is to save as much as possible on production and optimize this process so that the enterprise develops and becomes more successful. As a result of these measures, the profitability of the organization also increases, which means that there are more opportunities to invest in it.

To plan production costs, you need to take into account their size in previous cycles. In accordance with the volume of goods produced, a decision is made to reduce or increase production costs.

Balance sheet and costs

Among the accounting documentation of each company there is a "Profit and Loss Statement". This is where all your expenses are recorded.

A little more about this document. This report does not characterize the property status of the enterprise in general, but provides information about its activities for the selected time period. In accordance with OKUD, the profit and loss statement has a form 2. Income and expenses are recorded in it incrementally from the beginning to the end of the year. The report includes a table, in line 020 of which the main costs of the organization are displayed, in line 029 - the difference between profit and costs, in line 040 - expenses included in account 26. The latter are travel expenses, payment for the protection of premises and labor, employee remuneration. Line 070 shows the company's interest on credit obligations.

The initial results of the calculations (when compiling the report) are divided into direct and indirect costs. If we consider these indicators separately, then direct costs can be considered fixed costs, and indirect costs - variables.

In the balance sheet, cost data is not recorded directly, it shows only the assets and financial liabilities of the enterprise.

Accounting costs (otherwise called explicit)- is a payment in cash equivalent of any transactions. They are closely related to the economic costs and income of the firm. We subtract the explicit costs from the company's profit, and if we get zero, then the organization has used its resources in the most correct way.

Cost Calculation Example

Consider an example of calculating accounting and economic costs and profits. The owner of the recently opened laundry planned to receive an income of 120,000 rubles a year. To do this, he will have to cover the costs:

• rent of premises - 30,000 rubles;
• salary for administrators - 20,000 rubles;
• purchase of equipment - 60,000 rubles;
• other small expenses - 15,000 rubles;

Credit payments - 30%, deposit - 25%.

The head of the enterprise bought the equipment at his own expense. Washing machines break down after a while. Given this, it is necessary to create a depreciation fund, into which 6,000 rubles will be transferred every year. All of the above are explicit costs. Economic costs - the possible profit of the owner of the laundry, in case of acquiring a deposit. To pay the initial expenses, he will have to use a bank loan. Loan in the amount of 45,000 rubles. will cost him 13,500 rubles.

Thus, we calculate explicit costs: 30 + 2 * 20 + 6 + 15 + 13.5 = 104.5 thousand rubles. Implicit (deposit interest): 60 * 0.25 = 15 thousand rubles.

Accounting income: 120-104.5 \u003d 15.5 thousand rubles.

Economic income: 15.5-15=0.5 thousand rubles.

Accounting and economic costs differ from each other, but they are usually considered together.

The value of production costs

Production costs form the law of economic demand: with an increase in the price of a product, the level of its market supply increases, and with a decrease, the supply decreases, while maintaining other conditions. The essence of the law is that each manufacturer wants to offer the maximum amount of goods at the highest price, which is the most profitable.

For the buyer, the cost of the goods is a deterrent. The high price of a product forces the consumer to buy less of it; and, accordingly, cheaper products are purchased in large volumes. The manufacturer receives a profit for the product released, so he seeks to produce it in order to acquire revenue from each unit of the product, in the form of its price.

What is the main role of production costs? Consider it on the example of processing industrial enterprise. In a certain period of time, production costs increase. To compensate for them, you need to raise the price of the product. The increase in costs is due to the fact that it is impossible to quickly expand the production area. The equipment is overloaded, which reduces the efficiency of the enterprise. Thus, in order to produce a product with the highest cost, the firm must set more than high price. Price and supply level are directly related.

Production costs in the short run are divided into fixed and variable.

Fixed costs (TFC) are production costs that do not depend on the firm's output and must be paid even if the firm does not produce anything. Associated with the very existence of the firm and depend on the amount of fixed resources and the corresponding prices of these resources. These include: wage senior executives, interest on loans, depreciation, rent of space, cost of equity capital and insurance payments.

Variable costs (TVC) are such costs, the value of which varies depending on the volume of output, this is the sum of the company's costs for variable resources used in the production process: wages production staff, materials, payment for electricity and fuel, transportation costs. Variable costs increase as the volume of production increases.

General (cumulative) costs (TC) are the sum of fixed and variable costs: TC=TFC+TVC. At zero output, variable costs are zero and total costs are fixed costs. After the start of production in the short run, variable costs begin to rise, causing an increase in general costs.

The nature of the curves of total (TC) and total variable costs (TVC) is explained by the principles of increasing and diminishing returns. As returns increase, the TVC and TC curves rise to a decreasing degree, and as returns begin to fall, costs rise to an increasing degree. Therefore, to compare and determine the efficiency of production, average production costs are calculated.

Knowing the average cost of production, it is possible to determine the profitability of producing a given quantity of products.

Average production costs are the costs per unit of output. Average costs, in turn, are divided into average fixed, average variable and average total.

Average fixed costs (AFC) are fixed costs per unit of output. AFC=TFC/Q, where Q is the number of products produced. Since fixed costs do not vary with output, average fixed costs decrease as the number of products sold increases. Therefore, the AFC curve falls continuously as output rises, but does not cross the output axis.

Average Variable Costs (AVC) are the variable costs per unit of output: AVC=TVC/Q. Average variable costs are subject to the principles of increasing and decreasing returns to factors of production. The AVC curve has an arcuate shape. Under the influence of the principle of increasing returns, average variable costs initially fall, but after reaching a certain point, they begin to increase under the influence of the principle of diminishing returns.

There is an inverse relationship between variable production costs and the average product of a variable factor of production. If the variable resource is labor (L), then the average variable cost is wages per unit of output: AVC=w*L/Q (where w is the wage rate). Average product of labor APL = output per unit of factor used Q/L: APL=Q/L. Result: AVC=w*(1/APL).

Average total cost (ATC) is the cost per unit of output. They can be calculated in two ways: by dividing the total cost by the quantity produced, or by adding the average fixed and average variable costs. The AC curve (ATC) has an arcuate shape like average variable costs, but exceeds it by the amount of average fixed costs. As output increases, the distance between AC and AVC shortens due to the faster decline in AFC, but never reaches the AVC curve. The AC curve continues to fall after an AVC-trough release, because AFCs that continue to decline more than offset weak AVC gains. However, with a further increase in production, the increase in AVC begins to outstrip the decrease in AFC, and the AC curve turns up. The minimum point of the AC curve determines the most efficient and productive level of production in the short run.

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Gross costs. The division of costs into fixed and variable is important.

Fixed costs (FC) are costs that do not change or change slightly depending on changes in the volume of production. These include: depreciation of building structures, the cost of managing production and the company as a whole (general production and general business expenses), rent, salaries of managerial employees and managers, interest on borrowed capital, etc.

Variable costs VC are costs that change in direct proportion to changes in output. These include: piecework wages of workers, costs of raw materials, materials, process fuel, energy, transport services and etc.

The difference between fixed and variable costs is significant. Fixed costs must be paid, even if no product is produced at all, variable costs can be managed by the enterprise by changing the volume of production.

Under the total (gross) costs of the firm is understood as the sum of its fixed and variable costs. Total costs increase with each new unit of output by the same amount as the sum of variable costs.

However, information is important for the company not only about total costs, but also about the costs per unit of production, that is, average costs. Average total cost (ATC) is the total cost per unit of output:

where, Q is the volume of production

Accordingly, average variable and average fixed costs are calculated:

AFC=FC/Q; AVC=VC/Q; ATC = AFC + AVC.

Average variable costs, as can be seen from the graph, first fall, reach a minimum, and then begin to rise. In practice, this means that with a small volume of production, the process will be relatively inefficient and expensive, since the equipment will be underloaded, the division of labor will be shallow, technological processes less perfect. As production expands due to the positive economies of scale, its efficiency will increase, and variable costs per unit of output will decrease.

Positive economies of scale (economy from mass production) are observed under the influence of the following factors:

• - The labor of workers is specialized. With the expansion of production, there is no need to combine professions, the loss of time for the transition to different jobs is reduced, additional skills are acquired;
• - Specializes and saves managerial labor;
• - More efficient use of equipment, machinery, in general, fixed and working capital. The opportunity to use more productive expensive equipment and progressive technologies is expanding;
• - There is an opportunity to produce a deeper processing of raw materials, to use technological waste.

But the use of more and more variable resources will eventually lead to the fact that the law of diminishing returns will come into play. From this point on, the use of resources will be so complete and intense that each additional unit of variable resources will increase output by a smaller amount.

The curve of average gross costs depends on the type of curve of average fixed and average variable costs. The volume of production at which the average gross cost is minimal is called the optimal volume in terms of costs. If only costs are taken into account, then such a volume of production is the most profitable for the enterprise.

Considering the question of production volumes, it is necessary to take into account not only average, but also marginal costs.

Marginal costs MC are the costs required to produce an additional unit of output.

A firm expands production if an additional unit of output costs it less than its selling price, until marginal cost equals the price of production. Curve marginal cost has a U-shape, which is associated with the law of diminishing returns, when additional efforts are applied to limited or fixed factors of production in ever-increasing amounts.

The behavior of the curves MC, ATC, AVC obeys the so-called marginal-average rule, according to which the marginal costs will be equal to the average costs in their minimum value. On the chart, this rule will mean the intersection of the MC curve, the ATC and AVC curves at their minimum point.

The minimum (critical) volume of production will be at the point of equality of marginal and average total costs. With such a volume of production, the firm does not receive any profit or loss. If we proceed from the fact that the firm considers the prevailing market price P as given and adjusts its production to it, then it will strive to produce so many products Q-opt that the price is equal to marginal cost. The above is true for perfect competition when the price is constant. For conditions imperfect competition the optimal volume of production is at the point of equality of marginal cost and marginal revenue MR, that is, the income received from the production of an additional unit of output.