Fixed and variable costs of a company: what are they? Fixed production costs Example of calculating production costs

Classification of enterprise costs implies their division into two types: fixed and variable. change in proportion to changes in production volumes. In practice, costs of one type may be variable for one enterprise, but constant for another.

Variable production costs

The growth or reduction of this variable cost depends on the dynamics of production volumes. Another name - proportional costs - is due to the fact that they increase and decrease in proportion to the increase or decrease in the volume of production activity.
This type of costs includes:

• piecework wage costs;
• expenses for the purchase of raw materials;
• electricity costs;
• transport, trade commissions and other expenses.

Fixed production costs

The growth or reduction of this type of costs is practically not affected by production dynamics, but only up to a certain point. Fixed costs, which can also be called fixed or disproportionate, include:

• rent;
• payment of utilities;
• Administrative expenses;
• interest on loans;
• deductions for depreciation;
• salaries of managers at different levels.

How do variable and fixed costs change?

The concept of average fixed costs

Definition 1

Average fixed costs represent the manufacturer's costs per unit of production, which in the short term do not change their value regardless of changes in production volumes.

Average fixed costs are calculated within a certain time period and in relation to a certain cost center. The value of the average fixed costs indicator is obtained as a result of calculations using the following formula:

In this formula, AFC – average fixed costs, average fixed costs; TFC – total fixed costs, total fixed costs, Q – quantity of products produced in the billing period by the cost center in question.

Graphical average fixed costs represent a parabolic line, the asymptotes of which approach the coordinate axes. This generally indicates a decrease in average fixed costs as production volume increases, which encourages the company to increase the quantity of products produced.

Constant costs are understood as costs, the change of which does not depend on production volumes. Despite the name, fixed costs can change over time.

Example 1

The cost of renting a production workshop is considered as a fixed production cost, since it does not depend on the volume of products produced in it (that is, the company will bear these costs even if it does not produce anything during the period under consideration), however, over time, the lessor can increase this cost .

The indicator of average fixed costs takes into account both the possible change in fixed costs during the period of time under consideration, and its relationship with changes in the volume of production.

Note 1

An increase in fixed costs simultaneously with an increase in production volume is possible in a situation where a company increases production capacity, which leads to an increase in rent and the number of products produced. In this case, the company's average fixed costs would not reflect significant changes, which would indicate that the increase was appropriate.

The value of average fixed costs

Fixed costs are the costs of a company that are associated with its very existence, as opposed to variable costs, which are determined by its functioning. Any company incurs fixed costs, even if production is suspended during any period of time.

Example 2

Examples of fixed costs are lease payments, bond payments, depreciation on buildings or equipment, insurance premiums, and management salaries.

The indicator of average fixed costs reflects the value of the company's fixed costs attributable to the production of one unit of product during the period of time under study. Based on the features of calculating this indicator, we can conclude that the value of average fixed costs decreases as production volume increases. This means that the fixed costs that the company incurs are distributed over a larger number of products as the number of products produced increases, which allows the company to reduce production costs and increase profits.

There are several cost classifications enterprises: accounting and economic, explicit and implicit, constant, variable and gross, repayable and non-refundable, etc.

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

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What are fixed production costs

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

Fixed costs: examples

The following types of enterprise expenses can be classified as fixed costs in the short term:

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

Variable and total costs

In addition, the enterprise also has variable costs - this is the cost of raw materials, supplies, 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 products produced.

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

These indicators are necessary for conducting a financial analysis of the company’s activities, calculating its efficiency, searching for opportunities to reduce the cost of products produced by the enterprise, and increasing the competitiveness of the organization.

A reduction in average fixed costs can be achieved by increasing the volume of products produced 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 arbitrary. At different periods of time, when 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 expenses are classified as variable or overhead costs.

Examples of expenses that can be classified as one or the other type of cost are:

There are a large number of ways in which a company makes a profit, and the important thing is the fact of costs. Costs represent the actual expenses that a company incurs in its operation. If a company is unable to pay attention to cost categories, then the situation may become unpredictable and profit margins may decrease.

Fixed production costs must be analyzed when constructing their classification, with the help of which you can determine an idea of ​​their properties and main characteristics. The main classification of production costs includes fixed, variable, and total costs.

Fixed production costs

Fixed production costs are an element of the break-even point model. They are costs regardless of the volume of output and are contrasted with variable costs. When combined, fixed and variable costs represent the total costs of the business. Fixed costs can be composed of several elements:

1. premises rental,
2. deductions for depreciation,
3. management and administrative personnel costs,
4. cost of machinery, equipment and equipment,
5. security of production premises,
6. payment of interest on bank loans.

Fixed costs are represented by the costs of enterprises, which are constant in short periods and do not depend on changes in production volumes. This type of cost must be paid even if the enterprise does not produce anything.

Average fixed costs

Average fixed costs can be obtained by calculating the ratio of fixed costs and output volume. Thus, average fixed costs represent the constant cost of producing products. In total, fixed costs do not depend on production volumes. For this reason, average fixed costs will tend to decrease as the number of products produced increases. This occurs because as production volumes increase, the amount of fixed costs is distributed over a larger number of products.

Features of fixed costs

Fixed costs in the short term do not change in accordance with changes in production volume. Fixed costs are sometimes called sunk costs or overhead. Fixed costs include the costs of maintaining buildings, areas, and purchasing equipment. The fixed cost category is used in several formulas.

Thus, when determining total costs (TC), a combination of fixed and variable costs is necessary. Total costs are calculated using the formula:

This type of cost increases with increasing production volumes. There is also a formula for determining total fixed costs, which are calculated by dividing fixed costs by a certain volume of products produced. The formula looks like this:

Average fixed costs are used to calculate average total costs. Average total costs are found through the sum of average fixed and variable costs using the formula:

Short-term fixed costs

Living and past labor is expended in the production of products. In this case, each enterprise strives to obtain the greatest profit from its operation. In this case, each enterprise can take two paths - sell products at a higher price or reduce their costs for producing products.

In accordance with the time spent on changing the amount of resources used in production processes, it is customary to distinguish between long-term and short-term periods of enterprise activity. The short-term interval is a time period during which the size of the enterprise, its output and costs change. At this time, a change in the volume of products occurs through a change in the volume of variable costs. In short-term periods, an enterprise can quickly change only variable factors, including raw materials, labor, fuel, and auxiliary materials. The short-term period divides costs into fixed and variable. During such periods, fixed costs are mainly provided, determined by fixed costs.

Fixed production costs receive their name in accordance with their unchanging nature and independence in relation to production volume.

Short term is a period of time during which some factors of production are constant and others are variable.

Fixed factors include fixed assets and the number of firms operating in the industry. During this period, the company has the opportunity to vary only the degree of utilization of production capacity.

Long term is a period of time during which all factors are variable. In the long term, a company has the opportunity to change the overall size of buildings, structures, the amount of equipment, and the industry - the number of firms operating in it.

Fixed costs (FC) - these are costs, the value of which in the short term does not change with an increase or decrease in production volume.

Fixed costs include costs associated with the use of buildings and structures, machinery and production equipment, rent, major repairs, as well as administrative costs.

Because As production volume increases, total revenue increases, then average fixed costs (AFC) represent a decreasing value.

Variable costs (VC) - these are costs, the value of which changes depending on the increase or decrease in production volume.

Variable costs include the cost of raw materials, electricity, auxiliary materials, and labor.

Average variable costs (AVC) are:

Total costs (TC) – a set of fixed and variable costs of the company.

Total costs are a function of output produced:

TC = f (Q), TC = FC + VC.

Graphically, total costs are obtained by summing the curves of fixed and variable costs (Fig. 6.1).

Average total cost is: ATC = TC/Q or AFC +AVC = (FC + VC)/Q.

Graphically, ATC can be obtained by summing the AFC and AVC curves.

Marginal Cost (MC) is the increase in total costs caused by an infinitesimal increase in production. Marginal cost usually refers to the cost associated with producing an additional unit of output.

20. Long-run production costs

The main feature of costs in the long run is the fact that they are all variable in nature - the firm can increase or reduce capacity, and it also has enough time to decide to leave a given market or enter it by moving from another industry. Therefore, in the long run, average fixed and average variable costs are not distinguished, but average costs per unit of production (LATC) are analyzed, which in essence are also average variable costs.

To illustrate the situation with costs in the long run, consider a conditional example. Some enterprise expanded over a fairly long period of time, increasing its production volumes. The process of expanding the scale of activity will be conditionally divided into three short-term stages within the analyzed long-term period, each of which corresponds to different enterprise sizes and volumes of output. For each of the three short-term periods, short-term average cost curves can be constructed for different enterprise sizes - ATC 1, ATC 2 and ATC 3. The general average cost curve for any volume of production will be a line consisting of the outer parts of all three parabolas - graphs of short-term average costs.

In the example considered, we used a situation with a 3-stage expansion of the enterprise. A similar situation can be assumed not for 3, but for 10, 50, 100, etc. short-term periods within a given long-term period. Moreover, for each of them you can draw the corresponding ATS graphs. That is, we will actually get a lot of parabolas, a large set of which will lead to the alignment of the outer line of the average cost graph, and it will turn into a smooth curve - LATC. Thus, long-run average cost (LATC) curve represents a curve that envelops an infinite number of short-term average production cost curves that touch it at their minimum points. The long-run average cost curve shows the lowest cost per unit of production at which any level of output can be achieved, provided that the firm has time to change all factors of production.

In the long run there are also marginal costs. Long Run Marginal Cost (LMC) show the change in the total amount of costs of the enterprise in connection with a change in the volume of output of finished products by one unit in the case when the company is free to change all types of costs.

The long-run average and marginal cost curves relate to each other in the same way as the short-run cost curves: if LMC lies below LATC, then LATC falls, and if LMC lies above laTC, then laTC rises. The rising portion of the LMC curve intersects the LATC curve at the minimum point.

There are three segments on the LATC curve. In the first of them, long-term average costs are reduced, in the third, on the contrary, they increase. It is also possible that there will be an intermediate segment on the LATC chart with approximately the same level of costs per unit of output at different values ​​of output volume - Q x. The arcuate nature of the long-term average cost curve (the presence of decreasing and increasing sections) can be explained using patterns called positive and negative effects of increased scale of production or simply scale effects.

The positive effect of scale of production (the effect of mass production, economies of scale, increasing returns to scale of production) is associated with a decrease in costs per unit of production as production volumes increase. Increasing returns to scale of production (positive economies of scale) occurs in a situation where output (Q x) grows faster than costs rise, and therefore the enterprise's LATC falls. The existence of a positive effect of scale of production explains the descending nature of the LATS graph in the first segment. This is explained by the expansion of the scale of activity, which entails:

1. Increased labor specialization. Labor specialization presupposes that diverse production responsibilities are divided among different workers. Instead of carrying out several different production operations at the same time, which would be the case with a small-scale enterprise, in conditions of mass production each worker can limit himself to one single function. This results in an increase in labor productivity and, consequently, a reduction in costs per unit of production.

2. Increased specialization of managerial work. As the size of an enterprise grows, the opportunity to take advantage of specialization in management increases, when each manager can focus on one task and perform it more efficiently. This ultimately increases the efficiency of the enterprise and entails a reduction in costs per unit of production.

3. Efficient use of capital (means of production). The most efficient equipment from a technological point of view is sold in the form of large, expensive kits and requires large production volumes. The use of this equipment by large manufacturers allows them to reduce costs per unit of production. Such equipment is not available to small firms due to low production volumes.

4. Savings from using secondary resources. A large enterprise has more opportunities to produce by-products than a small company. A large firm thus makes more efficient use of the resources involved in production. Hence the lower costs per unit of production.

The positive effect of scale of production in the long run is not unlimited. Over time, the expansion of an enterprise can lead to negative economic consequences, causing a negative effect of scale of production, when the expansion of the volume of a company's activities is associated with an increase in production costs per unit of output. Diseconomies of scale occurs when production costs rise faster than production volume and, therefore, LATC rises as output increases. Over time, an expanding company may encounter negative economic facts caused by the complication of the enterprise management structure - the management floors separating the administrative apparatus and the production process itself are multiplying, top management turns out to be significantly removed from the production process at the enterprise. Problems arise related to the exchange and transmission of information, poor coordination of decisions, and bureaucratic red tape. The efficiency of interaction between individual divisions of the company decreases, management flexibility is lost, control over the implementation of decisions made by the company's management becomes more complicated and difficult. As a result, the operating efficiency of the enterprise decreases and average production costs increase. Therefore, when planning its production activities, a company needs to determine the limits of expanding the scale of production.

In practice, cases are possible when the LATC curve is parallel to the x-axis at a certain interval - on the graph of long-term average costs there is an intermediate segment with approximately the same level of costs per unit of output for different values ​​of Q x. Here we are dealing with constant returns to scale of production. Constant returns to scale occurs when costs and output grow at the same rate and, therefore, LATC remains constant at all output levels.

The appearance of the long-term cost curve allows us to draw some conclusions about the optimal enterprise size for different sectors of the economy. Minimum effective scale (size) of an enterprise- the level of output from which the effect of savings due to an increase in the scale of production ceases. In other words, we are talking about such values ​​of Q x at which the company achieves the lowest costs per unit of production. The level of long-term average costs determined by the effect of economies of scale affects the formation of the effective size of the enterprise, which, in turn, affects the structure of the industry. To understand, consider the following three cases.

1. The long-term average cost curve has a long intermediate segment, for which the LATC value corresponds to a certain constant (Figure a). This situation is characterized by a situation where enterprises with production volumes from Q A to Q B have the same cost. This is typical for industries that include enterprises of different sizes, and the level of average production costs for them will be the same. Examples of such industries: wood processing, timber industry, food production, clothing, furniture, textiles, petrochemical products.

2. The LATC curve has a fairly long first (descending) segment, in which there is a positive effect of production scale (Figure b). The minimum cost is achieved with large production volumes (Q c). If the technological features of the production of certain goods give rise to a long-term average cost curve of the described form, then large enterprises will be present in the market for these goods. This is typical, first of all, for capital-intensive industries - metallurgy, mechanical engineering, automotive industry, etc. Significant economies of scale are also observed in the production of standardized products - beer, confectionery, etc.

3. The falling segment of the long-term average costs graph is very insignificant; the negative effect of scale of production quickly begins to work (Figure c). In this situation, the optimal production volume (Q D) is achieved with a small volume of output. If there is a large-capacity market, we can assume the possibility of the existence of many small enterprises producing this type of product. This situation is typical for many sectors of the light and food industries. Here we are talking about non-capital-intensive industries - many types of retail trade, farms, etc.

Selecting factors of production that minimize production

Let's start by considering the fundamental problem that all firms face: how to choose the combination of factors to achieve a certain level of output at minimum cost. To simplify, let's take two variable factors: labor (measured in hours of work) and capital (measured in hours of use of machinery and equipment). We assume that both labor and capital can be hired or rented in competitive markets. The price of labor is equal to the wage rate w, and the price of capital is equal to the rent for equipment r. We assume that capital is "rented" rather than purchased, and can therefore put all business decisions on a comparative basis. Since labor and capital are attracted competitively, we assume the price of these factors to be constant. We can then focus on the optimal combination of factors of production without worrying that large purchases will cause a jump in the prices of the factors of production used.

22 Determining Price and Output in a Competitive Industry and in a Pure Monopoly A pure monopoly promotes inequality in the distribution of income in society as a result of monopoly market power and charging higher prices at the same costs than in pure competition, which allows for monopoly profits. In conditions of market power, it is possible for a monopolist to use price discrimination, when different prices are set for different buyers. Many of the purely monopolistic firms are natural monopolies, which are subject to mandatory government regulation in accordance with antitrust laws. To study the case of a regulated monopoly, we use graphs of demand, marginal revenue and costs of a natural monopoly, which operates in an industry where positive economies of scale occur at all output volumes. The higher the firm's output, the lower its average ATC costs. Due to this change in average costs, the marginal costs of MC for all volumes of production will be lower than average costs. This is explained by the fact that, as we have established, the marginal cost graph intersects the average cost graph at the minimum point of the ATC, which is absent in this case. We show the determination of the optimal volume of production by a monopolist and possible methods of regulating it in Fig. Price, marginal revenue (marginal income) and costs of a regulated monopoly As can be seen from the graphs, if this natural monopoly were unregulated, then the monopolist, in accordance with the rule MR = MC and the demand curve for its products, chose the quantity of products Qm and the price Pm, which allowed to get maximum gross profit. However, the price Pm would exceed the socially optimal price. The socially optimal price is the price that ensures the most efficient allocation of resources in society. As we established earlier in topic 4, it must correspond to marginal cost (P = MC). In Fig. this is the price Po at the intersection point of the demand schedule D and the marginal cost curve MC (point O). The production volume at this price is Qо. However, if government agencies fixed the price at the level of the socially optimal price Po, this would lead the monopolist to losses, since the price Po does not cover the average gross costs of the vehicle. To solve this problem, the following main options for regulating a monopolist are possible: Allocation of state subsidies from the budget of the monopoly industry to cover the gross loss in the case of establishing a fixed price at the socially optimal level. Granting the monopoly industry the right to conduct price discrimination in order to obtain additional income from more solvent consumers to cover the monopolist's losses. Setting the regulated price at a level that ensures normal profits. In this case, the price is equal to the average gross cost. In the figure, this is the price Pn at the intersection point of the demand schedule D and the average gross cost curve of the ATC. The output at the regulated price Pn is equal to Qn. The price Pn allows the monopolist to recover all economic costs, including making a normal profit.

23. This principle is based on two main points. First, the firm must decide whether it will produce the product. It should be produced if the company can make either a profit or a loss that is less than fixed costs. Secondly, you need to decide how much of the product should be produced. This production volume must either maximize profits or minimize losses. This technique uses formulas (1.1) and (1.2). Next, you should produce such a volume of production Qj that maximizes profit R, i.e.: R(Q) ^max. The analytical determination of the optimal production volume is as follows: R, (Qj) = PMj Qj - (TFCj + UVCj QY). Let us equate the partial derivative with respect to Qj to zero: dR, (Q,) = 0 dQ, " (1.3) РМг - UVCj Y Qj-1 = 0. where Y is the coefficient of change in variable costs. The value of gross variable costs changes depending on the change in volume production. The increase in the amount of variable costs associated with an increase in production volume by one unit is not constant. It is assumed that variable costs increase at an increasing pace. This is explained by the fact that constant resources are fixed, and in the process of production growth, variable resources increase. Thus, marginal productivity falls and, therefore, variable costs increase at an increasing rate. "To calculate variable costs, it is proposed to apply a formula, and based on the results of statistical analysis it is established that the coefficient of change in variable costs (Y) is limited to the interval 1< Y < 1,5" . При Y = 1 переменные издержки растут линейно: TVCг = UVCjQY, г = ЇЯ (1.4) где TVCг - переменные издержки на производство продукции i-го вида. Из (1.3) получаем оптимальный объем производства товара i-го вида: 1 f РМг } Y-1 QOPt = v UVCjY , После этого сравнивается объем Qг с максимально возможным объемом производства Qjmax: Если Qг < Qjmax, то базовая цена Рг = РМг. Если Qг >Qjmax, then, if there is a production volume Qg at which: Rj(Qj) > 0, then Рg = PMh Rj(Qj)< 0, то возможны два варианта: отказ от производства i-го товара; установление Рг >RMg. The difference between this method and approach 1.2 is that here the optimal sales volume is determined at a given price. It is then also compared to the maximum "market" sales volume. The disadvantage of this method is the same as that of 1.2 - it does not take into account the entire possible composition of the enterprise’s products in conjunction with its technological capabilities.