Fixed costs. Lecture notes: Firm costs: fixed and variable Main types of variable costs

Any company operates to generate income, and its work is impossible without money spent. There are different types of such expenses. There are types of activities that require constant financial investments. But some of the costs are not regular, and their impact on the progress of the product and its sales must also be taken into account.

So, the main point of any company is to release a product and generate income from it. To start this activity, you first need to purchase raw materials, production tools, and hire labor. Certain funds are spent on this; in economics they are called costs.

People invest money in productive activities for a variety of purposes. In accordance with this, a classification of expenses was adopted. Cost categories (depending on properties):

• Explicit. Such costs are incurred 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 managers that are not specified in contracts.
• Permanent. Means that ensure continuous production processes.
• Variables. Costs that can be easily adjusted while maintaining the same level of product output.
• Non-refundable. Expenses of movable assets that are invested in the company's activities free of charge. Characteristic of the initial period of production or re-profiling of an organization. These funds can no longer be spent on other organizations.
• Average. Costs obtained during calculations that characterize investments in each unit of product. This indicator contributes to the pricing of the product.
• Limit. This is the largest cost that cannot be increased due to the low efficiency of capital investments in the company.
• Appeals. Costs of delivering goods from manufacturer to consumer.

Application of fixed and variable costs

Let's consider the differences between fixed costs and variable costs and their economic characteristics.

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

Second type of costs (variables) changes in each production cycle, with virtually no repetitions 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 - those that remain unchanged over a certain period of time. What can be attributed to them?

1. Payment of utilities;
2. Costs of operating premises;
3. Payment of rent;
4. Salaries of 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, relates only to the total number of units produced. If such costs are calculated for each unit, their size will decrease in accordance with the increase in output. This fact applies to all types of production.

Variable costs are proportional to the changing quantity or volume of goods produced. These include:

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

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

Examples of costs:

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 was previously established, costs over a short period of time can be variable or constant.

Such characteristics are not suitable for a long time, because the costs will vary in this case.

Examples of fixed costs

Fixed costs remain at the same level for any volume of product output, in a short time period. These are costs for the company's stable factors that are not proportional to the number of units of the product. Examples of such expenses are:

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

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

Variable Cost Examples

Variable costs, on the contrary, are essentially investments in the production of goods, and therefore depend on its volume. The amount of investment is directly proportional to the quantity of goods produced. Examples could include costs for:

• for raw material reserves;
• 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 provision of services.

Consider the variable cost graph, which is a curve. (Figure 1.)

Fig. 1 - graph of variable costs

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

Example of calculating production costs:

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

• rent – ​​25,000 rub.;
• 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 rubles.

Our task: to calculate 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 expenses are unchangeable, depending on production volumes, so they are easy to calculate: 25,000 + 11,000 = 36,000 rubles.

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

Consequently, annual variable costs are calculated as follows: 2000 * 32 = 64,000 rubles.

General costs– this is the sum of variables and constants: 36000+64000=100000 rubles.

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

Production cost planning

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

In the process of cost analysis, options for the economical use of finances are considered, which are invested in production and must be distributed correctly. This leads to a reduction in production costs, and hence the final price of the manufactured product, as well as an increase in the company’s competitiveness 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 increases, which means there are more opportunities to invest in it.

To plan production costs, you need to take into account their sizes 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”. All information about expenses is recorded there.

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 form 2. In it, income and expense indicators are recorded progressively from the beginning to the end of the year. The report includes a table in which line 020 displays the organization's main expenses, line 029 shows the difference between profit and costs, line 040 shows expenses included in account 26. The latter represent travel costs, payment for premises and labor protection, and employee benefits. Line 070 shows the company's interest on loan obligations.

The initial calculation results (when reporting) are divided into direct and indirect costs. If we consider these indicators separately, then direct costs can be considered fixed costs, and indirect costs - variable.

The balance sheet does not record costs directly; it only shows the assets and financial liabilities of the business.

Accounting costs (otherwise known as explicit costs)- This is payment in monetary terms for any transactions. They have a close relationship with the economic costs and income of the company. Let's subtract explicit costs from the company's profit, and if we get zero, then the organization has used its resources in the most correct way.

Example of cost calculation

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

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

Loan payments – 30%, deposit – 25%.

The head of the enterprise purchased the equipment at his own expense. Washing machines are subject to breakdown after some time. Taking this into account, you need to create a depreciation fund, into which 6,000 rubles will be transferred every year. All of the above are obvious expenses. Economic costs are the possible profit of the laundry owner if a deposit is purchased. 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 the 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=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 also decreases, while other conditions remain the same. The essence of the law is that each manufacturer wants to offer the maximum quantity of goods at the highest price, which is the most profitable.

For the buyer, the cost of the product is a limiting factor. The high price of a product forces the consumer to buy less of it; and accordingly, cheaper products are purchased in larger volumes. The manufacturer receives a profit for the released product, so he strives 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? Let's consider it using the example of a manufacturing industrial enterprise. Over 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, to produce a product at the highest cost, the firm must set a higher price for it. Price and supply level are directly related.

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?

Variable costs may not increase as quickly as production and sales volumes. For example, when purchasing raw materials in larger volumes than usual, it is possible to receive large discounts.
As production volumes increase, the level of fixed costs per unit of output decreases, but this does not happen indefinitely, but until it is necessary to rent additional premises, purchase fixed assets, expand the staff of management employees, etc.
An increase in fixed costs with an increase in sales volumes occurs at almost the same speed as a decrease with a decrease. With variable costs, the situation is different: with an increase in sales volumes, they increase faster than they decrease in the event of a decline in production. This is due to the fact that some of the expenses do not disappear immediately: employees still have to pay salaries for some time, and the released equipment needs to be maintained and stored. This phenomenon is called the remanent effect. Its essence is that the absolute value of variable costs decreases, but their specific size per unit of output decreases more slowly than the decline in production.

The division of costs into fixed and variable is the basis of a method that is widespread in economics. It was first proposed in 1930 by engineer Walter Rautenstrauch as a planning method known as the critical production schedule or break-even schedule (Fig. 19).

The break-even chart in its various modifications is widely used in modern economics. The undoubted advantage of this method is that with its help you can quickly obtain a fairly accurate forecast of the main performance indicators of an enterprise when market conditions change.

When constructing a break-even schedule, it is assumed that there are no changes in prices for raw materials and products during the period for which planning is carried out; fixed costs are considered constant over a limited range of sales volumes; variable costs per unit of output do not change as sales volume changes; sales are carried out quite evenly.

When plotting a graph, the horizontal axis shows the volume of production in units of products or as a percentage of production capacity utilization, and the vertical axis shows production costs and income. Costs are deferred and divided into fixed (POI) and variable (PI). In addition to the lines of fixed and variable costs, the graph displays gross costs (VI) and revenue from sales of products (VR).

The point of intersection of the revenue and gross cost lines represents the break-even point (K). This point is interesting because with the corresponding volume of production and sales (V kr), the enterprise has neither profit nor loss. The production volume corresponding to the break-even point is called critical. When the production volume is less than critical, the enterprise cannot cover its costs with its revenue and, therefore, the result of its activities is losses. If the volume of production and sales exceeds the critical level, the enterprise makes a profit.

The break-even point can be determined and analytical method.

Revenue from product sales is determined by the expression

Where POI– fixed costs; PI – variable costs; P- profit.

If we take into account that at the break-even point profit is zero, then the point of critical production volume can be found using the formula

Sales revenue is the product of sales volume and product price. The total amount of variable costs can be calculated as the product of variable costs per unit of production and the volume of production corresponding to sales volume. Since at the break-even point the volume of production (sales) is equal to the critical volume, the previous formula takes the following form:

Where C– unit price; SPI– variable costs per unit of production; In kr- critical release.

Using break-even analysis, you can not only calculate the critical production volume, but also the volume at which the planned (target) profit can be obtained. This method allows you to choose the best option when comparing several technologies, etc.

The benefits of dividing costs into fixed and variable parts are used by many modern enterprises. Along with this, cost accounting at full cost and their corresponding grouping are widely used.

Test control

1. If fixed costs increase

The sum of all costs associated with the manufacture of a product is called cost. To make the cost of a product lower, it is necessary, first of all, to reduce production costs. To do this, it is necessary to break down the amount of expenses into components, for example: raw materials, supplies, electricity, wages, rent of premises, etc. It is necessary to consider each component separately and reduce costs for those expense items where possible.

Reducing costs in the production cycle is one of the important factors in the competitiveness of a product on the market. It is important to understand that it is necessary to reduce costs without compromising the quality of the product. For example, if according to technology the steel thickness should be 10 millimeters, then you should not reduce it to 9 millimeters. Consumers will immediately notice excessive savings, and in this case, a low price for a product will not always be a winning position. Competitors with higher quality will have an advantage, even though their price will be slightly higher.

Types of production costs

From an accounting point of view, all costs can be divided into the following categories:

• direct costs;
• indirect costs.

Direct costs include all fixed costs that remain unchanged with an increase/decrease in the volume or quantity of goods produced, for example: rent of an office building for management, loans and leasing, payroll for top management, accounting, and executives.

Indirect costs include all expenses incurred by the manufacturer during the manufacture of goods throughout all production cycles. These may be costs for components, materials, energy resources, workers' compensation fund, workshop rental, and so on.

It is important to understand that indirect costs will always increase as production capacity increases and, as a result, the quantity of goods produced will increase. Conversely, when the quantity of goods produced decreases, indirect costs decrease.

Efficient production

Each enterprise has a financial production plan for a certain period of time. Production always tries to stick to the plan, otherwise it threatens to increase production costs. This is due to the fact that direct (fixed) costs are distributed over the number of products produced over a certain period of time. If production does not fulfill the plan and produces less quantity of goods, then the total amount of fixed costs will be divided by the quantity of goods produced, which will lead to an increase in its cost. Indirect costs do not have a strong influence on the formation of cost when the plan is not fulfilled or, conversely, it is overfulfilled, since the number of components or energy expended will be proportionally greater or less.

The essence of any manufacturing business is making a profit. The task of any enterprise is not only to manufacture a product, but also to effectively manage it so that the amount of income is always greater than total costs, otherwise the enterprise cannot be profitable. The greater the difference between the cost of a product and its price, the higher the profitability of the business. Therefore, it is so important to conduct business while minimizing all production costs.

One of the key factors in reducing costs is the timely renewal of equipment and machine tools. Modern equipment is many times higher than similar machines and machines of past decades, both in energy efficiency and in accuracy, productivity and other parameters. It is important to go along with progress and modernize where possible. The installation of robots, smart electronics and other equipment that can replace human labor or increase line productivity is an integral part of a modern and efficient enterprise. In the long term, such a business will have advantages over its competitors.

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.