There are a large number of ways in which a company makes a profit, and the fact of cost is important. Costs are the real costs incurred by the company in its operation. If a company is unable to pay attention to the category of costs, then the situation may become unpredictable and profit margins may decrease.

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

Fixed costs of production

Fixed costs of production are an element of the break-even point model. They are costs regardless of the volume of output and are opposed to variable costs. The sum of fixed and variable costs represent the total costs of the enterprise. Fixed costs can be made up of several elements:

1. room rental,
2. deductions for depreciation,
3. management and administrative staff costs,
4. the cost of machines, machinery and equipment,
5. security of premises for production,
6. payment of interest on loans to banks.

Fixed costs are represented by the costs of enterprises, which are unchanged 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. Thus, average fixed costs represent the fixed cost of producing products. In sum, 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 is due to the fact that with an increase in production volumes, the amount of fixed costs is distributed over a larger number of products.

Features of fixed costs

Fixed costs in the short run do not change with changes in output. Fixed costs are sometimes referred to as sunk costs or overheads. Fixed costs include the costs of maintaining buildings, space, 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 needed. The total costs are calculated by the formula:

This type of cost increases with the increase in production volumes. There is also a formula for determining total fixed costs, which are calculated by dividing fixed costs by a certain volume of manufactured products. 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 according to the formula:

Fixed costs in the short run

In the production of products, living and past labor has been expended. In this case, each enterprise seeks to obtain the greatest profit from its operation. In this case, each enterprise can go in two ways - to sell products more expensively or to reduce their production costs.

In accordance with the time it takes to change the amount of resources used in production processes, it is customary to distinguish between long-term and short-term periods of the enterprise. The short-term interval is the time interval during which the size of the enterprise, its output and costs change. At this time, the 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 run divides costs into fixed and variable. During such periods, fixed costs are mainly provided, determined by fixed costs.

The fixed costs of production get their name in accordance with their invariable nature and independence in relation to the volume of production.

Any production activity requires financial costs for material and labor resources. The ratio of expenses for ensuring economic activity with the profit received determines the profitability of a business entity. In the economics of the enterprise, these factors occupy a central position, since they determine the level of competitiveness of the company in the market of similar activities that have a direct impact on the success of the implementation of an entrepreneurial idea.

The costs of the enterprise help to assess its level of profitability

What are costs

Economic activity carried out in any area is always accompanied by certain monetary expenditures for the purchase and use of resources.

These costs in terms of value are called enterprise costs. They not only influence the formation of the balance of income and expenses, but also determine the need for the acquisition of additional production factors, as well as the possibility of investing in this direction. The parameter allows you to determine the efficiency of production activities, as well as the degree of rationality of its organization.

Competence in the economic sphere, concerning the division of costs, allows the head of a business entity to determine in a timely manner the need to apply production methods that reduce costs and increase the return on investment in resources for the purchase of raw materials, materials, equipment and hired labor. Such achievements allow us to improve profitability indicators at the end of the reporting period.

Application of the concept in economic theory

What are production costs

The profit received as a result of economic activity is an important factor in the relationship of a value nature in a market economy. It is the main element of the management mechanism of a business entity. It is used to analyze the profitability of a business. Variable and fixed costs, examples of which are discussed below, determine the costs of the enterprise, depending on the value form of the income received. They serve as benchmarks for performance evaluation against which comparative analysis can be carried out.

Representatives of the state apparatus are interested in reducing costs, since this contributes to the growth of income received, which is the main source of replenishment of the budget. Therefore, when planning it, the statistical parameters of business entities in this area are taken into account, which make it possible to determine the potential amount of mandatory deductions.

What determines the value of the parameter

The value of production costs is directly proportional to the cost of acquired factors of resource value. The natural desire of the head of a business entity is to obtain maximum profit at minimum cost. A well-organized business process allows you to maintain the volume of production activities while minimizing costs, provided by reducing the resources put into circulation.

A business entity, carrying out activities, in the process of implementing its results, incurs additional costs associated with promotion on the market and sales. This article of commercial expenses, called implementation costs, includes financial expenses for the provision of activities. Variable costs also include marketing research, advertising, as well as transportation of products to its consumers.

What is the total cost

Separate items of expenditure include mandatory payments to the settlement accounts of state bodies, such as taxes, fees and deductions to trust funds. These types of cash expenditures are also components of entrepreneurial costs.

Read also: Non-linear depreciation method

Constituent Elements of a Parameter

The value of production costs is formed from three elements:

• cost price;
• price;
• price.

The cost price is called the initial costs of a business entity for the manufacture of a unit of output. The cost parameter includes all applicable types of costs that affect the amount of profit. The implementation of the result of labor is carried out at market value, taking into account the allowances that form the profit item.

Types of costs

Enterprise cost classification

There are several types of costs that are easier to understand if you imagine the structure of the enterprise. The result of any production is a transaction that determines the sale of the results of labor. The main position of the seller is to cover the costs of production activities. Therefore, the cost parameter is primarily laid down in the price. They may be of an economic, accounting or alternative nature.

economic costs

What is economic cost

Economic costs refer to the economic costs of providing a product or service. The constituent elements of the parameter are:

• material and labor resources acquired for the possibility of implementing production activities;
• previously purchased internal resources that are not included in the market turnover, without which the operation of the company is impossible;
• part of the profit, considered as compensation for the risk of possible losses or shortfall in income.

The entrepreneur seeks to compensate for the economic criteria of the parameter in terms of the cost of labor results. If he fails to do this, then the meaning of the functioning of the business is lost, and the head of the business entity should look for himself in other areas of activity.

Accounting

What are accounting costs

Accounting costs include items of expenditure, which include funds intended for the acquisition of economic resources. These include expenses that are not used to implement the production cycle, but without which its functioning is impossible:

• payment for mental or physical labor of employees;
• acquisition or lease of land or water resources;
• investment in capital goods, which may be of a physical or financial nature.

Accounting costs include only real and legally documented costs for the purchase of resources. The parameter takes into account the acquisition of equipment, tools, as well as movable and immovable property. This category can also include the issue of securities or shares used in the production process.

Accounting costs are always less than economic costs, because accounting does not allow abstraction.

The parameter can be direct or indirect. Direct costs take into account the money spent on production. Indirect costs imply cash costs that ensure the normal functioning of production. These include deductions for depreciation of equipment, payment of interest to banking institutions for the use of funds, as well as overhead costs.

Alternative

opportunity cost

Opportunity costs determine the costs of producing products that a business entity will most likely not produce due to the use of only individual elements of the process to ensure the functioning of the enterprise. They can be categorized as lost profit opportunities. The value of the parameter corresponds to the difference between economic and accounting costs. It is determined independently by each head of a business entity, depending on his personal idea of ​​the desired profitability of the business.

Classification of the parameter to determine the rational functioning of the enterprise

The growth of production volumes causes an increase in the costs of ensuring the normal functioning of a business entity.

No enterprise can develop and expand indefinitely, since each business entity has individual restrictions regarding the optimal size of the enterprise. To determine the limits of this boundary, apply variable and fixed costs.Such a division is acceptable for short time periods determined by production cycles, during which the factors are practically unchanged. For long-term periods, all parameters are categorized as variables.

FIXED COSTS

FIXED COSTS

(fixed cost) The part of gross costs that does not depend on the current level of production. Fixed costs include management costs and the cost of protecting the enterprise. Fixed costs in the short run do not affect the level of production that maximizes profit, but in the long run a firm that is unable to cover its fixed costs will inevitably be insolvent and cease to exist.

Economy. Dictionary. - M.: "INFRA-M", Publishing house "Ves Mir". J. Black. General editorial staff: Doctor of Economics Osadchaya I.M.. 2000 .

Economic dictionary. 2000 .

See what "FIXED COSTS" is in other dictionaries:

- (fixed costs) See: overhead costs. Business. Dictionary. Moscow: INFRA M, Ves Mir Publishing House. Graham Bets, Barry Brindley, S. Williams et al. Osadchaya I.M.. 1998 ... Glossary of business terms

fixed costs- FIXED COSTS Costs, the value of which does not depend on the volume of production in the short run. These are rent payments, depreciation, interest on loans and other costs that have to be reimbursed in any case. ... ... Dictionary-reference book on economics

fixed costs- Costs, the total amount of which is fixed for a given period of time for a given level of production ... Investment dictionary

fixed costs Costs that do not depend on the volume of production Economics: glossary

Fixed costs (English total fixed costs) an element of the break-even point model, which is a cost that does not depend on the magnitude of the volume of output, opposed to variable costs, with which they add up to total costs ... Wikipedia

fixed costs of production- expenses of the enterprise that do not directly depend on the volume of production, which cannot be increased or decreased in a short period of time in order to increase or reduce output. Usually this… … Dictionary of economic terms

- (average fixed cost) The average fixed cost over a period of time incurred by the cost centre. At first glance, it seems that there is a contradiction here: if the costs are constant, they do not change and, therefore, do not ... ... Glossary of business terms

conditionally fixed costs- conditionally fixed costs The dependence of these costs on production volumes has a stepwise nature (for example, the cost of storing materials and finished products). Topics economics Synonyms conditionally ... ...

Production costs are the costs associated with the production of goods. In accounting and statistical reporting, they are reflected in the form of cost. Includes: material costs, labor costs, interest on loans. ... ... Wikipedia

fixed costs- non-variable costs An element of costs or expenses that does not depend on the volume of activity in the short run. Also called non-variable or fixed costs. Wed with Variable Cost.… … Technical Translator's Handbook

Reading 8 min. Views 30 Published on 03/25/2018

Almost every person dreams of quitting his "uncle's job" and starting his own business, which will bring pleasure and a stable income. However, in order to become an aspiring entrepreneur, you will need to create a business plan containing a financial model of the future enterprise. Only this approach to business development will allow you to find out whether the investment in starting your own business can pay off. In this article, we propose to learn about what fixed and variable costs are and how they affect the profit of an enterprise.

Variable and fixed costs are the two main types of costs.

The importance of drawing up a financial model

Have you ever wondered why you need to write a business plan containing a financial model before starting your own business. Creating a business plan allows a novice entrepreneur to obtain information about the expected revenue of the enterprise, as well as determine fixed and variable costs. All these measures are aimed at choosing a strategy for developing the financial policy of the future business.

The commercial component is one of the basic foundations of a successful enterprise. Economic theory says that finance is a blessing, which should bring a new blessing. It is this theory that should be guided in the early stages of entrepreneurial activity. At the heart of every enterprise is the rule that profit is the value of paramount importance. Otherwise, your entire business model will turn into patronage.

After we have taken as a rule the theory that working at a loss is unacceptable, we should move on to the financial model itself. The profit of the enterprise is the difference between income and production costs. The latter are divided into two groups: variable and fixed costs of the organization. In a situation where the level of expenses exceeds current income, the company is considered unprofitable.

The main task of entrepreneurial activity is to extract the maximum benefit, subject to the minimum use of financial resources.

Based on this, we can conclude that in order to increase income, it is necessary to sell as many finished products as possible. However, there is another method of profit, which is to reduce production costs. It is quite difficult to understand this scheme, since the cost optimization process has many different nuances. It is important to mention that such economic terms as "cost level", "cost item" and "production cost" are synonymous. Let's look at all types of existing production costs.

Varieties of expenses

All expenses of the organization are divided into two groups: variable and fixed costs. This division helps to systematize the budgeting process, and also helps in planning a business development strategy.

Fixed costs are expenses that are not related to the production capacity of the enterprise.. This means that this amount does not depend on how much product will be manufactured.

Variable costs include conditionally fixed costs associated with entrepreneurial activity. Such expenses can change their properties and value, depending on the impact of internal and external economic factors.

What are the different types of expenses?

The salary of members of the administration of the enterprise can be considered among the fixed costs, but only in the situation when these employees receive payments regardless of the financial condition of the organization. It is important to note that in foreign countries, managers earn income from their organizational skills by expanding their customer base and exploring new market areas. On the territory of Russia, the situation is completely different. Most department heads receive high salaries that are not tied to their performance.

This approach to the organization of the production process leads to a loss of incentive to achieve better results. This can explain the low productivity of labor indicators of many commercial institutions, since there is simply no desire to master new technological processes at the top of the company.

Speaking about what fixed costs are, it should be mentioned that this article includes rent.. Let's imagine a private company that does not have its own real estate and is forced to rent a small space. In this situation, the administration of the company must monthly transfer a certain amount to the landlord. This situation is considered standard, since it is quite difficult to recoup the purchase of real estate. Some small and middle class entities will need at least five years to return the invested capital.

It is this factor that explains the fact that many entrepreneurs prefer to conclude an agreement on the lease of the necessary square meters. As mentioned above, rent costs are fixed because the owner of the premises is not interested in the financial condition of your company. For this person, only the timely receipt of payment fixed in the contract is important.

Fixed costs include depreciation costs. Any funds must be amortized monthly until their initial value is equal to zero. There are many different ways of depreciation, which are regulated by current legislation. According to experts, there are more than a dozen different examples of fixed costs.. These include utility bills, payment for the removal and processing of garbage and spending on providing the conditions necessary for the implementation of labor activities. A key feature of such expenses is the ease of calculating both present and future costs.

The concept of "variable costs" includes those types of costs that depend on the proportional volume of manufactured goods. For example, consider a balance sheet item, where there is an item related to raw materials and materials. In this paragraph, you should indicate the amount of funds that the company will need for production purposes. As an example, consider the activities of a company engaged in the manufacture of wooden pallets. For the manufacture of one unit of goods, it is required to spend two squares of processed wood. This means that it takes two hundred square meters of material to make one hundred pallets. It is these costs that are classified as variables.

It should be noted that the remuneration of the labor activity of employees can be included in both fixed and variable expenses. Similar cases are observed in the following situations:

1. With an increase in the production capacity of the enterprise, it is required to attract additional workers who will be employed in the manufacturing process.
2. The salary of employees is a percentage that depends on various deviations in the production process.

Under these conditions, it is very difficult to make a forecast about the necessary expenses in order to pay salaries to employees, since its volume will depend on many different factors. The division of costs into fixed and variable is carried out in order to analyze the profitability of the enterprise, as well as to determine the degree of unprofitability of the production process. It should be noted that in any production activity of the company, various energy resources are consumed. These resources include fuel, electricity, water and gas. Since their use is an integral part of production, an increase in the volume of products produced leads to an increase in the cost of these resources.

What are fixed and variable costs used for?

One of the goals of this classification of costs is the optimization of production costs. Taking into account such details during the creation of the financial model of the enterprise allows you to identify those positions that can be reduced to replenish income. Also, such data will help to find out how the cost reduction will affect the production capacity of the enterprise.

Below we propose to consider fixed and variable cost examples based on an organization engaged in the production of kitchen furniture. To carry out production activities, the management of such a company needs to invest finances in the payment of the lease agreement, utility costs, depreciation costs, the purchase of consumables and raw materials, as well as the salary of employees. After the list of total costs is compiled, all items on this list should be divided into variable and fixed costs.

The category of fixed costs includes depreciation costs, as well as the salary of the administration of the enterprise, including the accountant and director of the company. In addition, this article includes the cost of paying for electrical energy used to illuminate the premises. Variable costs include the purchase of raw materials and consumables needed to manufacture an incoming order. In addition, this article includes spending on utility bills, since some energy resources are used only in the production process itself. This category can include the wages of employees involved in the furniture manufacturing process, since the rate directly depends on the volume of products produced. Transportation costs are also included in the category of variable financial costs of the organization.

How do manufacturing costs affect the cost of a product?

After the financial model of the future enterprise has been created, it is necessary to analyze the impact of variable and fixed costs on the cost of manufactured goods. This allows you to reorganize the company's activities in order to optimize the production process. Such an analysis will help to understand how many personnel will be required to perform a particular task.

Such a plan allows you to determine the required level of investment in the development of the organization. It is possible to reduce the cost of energy resources by using alternative sources, as well as by purchasing more modernized equipment with a high efficiency. Further, it is recommended to analyze variable costs in order to determine their dependence on external factors.

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.

In contact with

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 conducting a financial analysis of the company's activities, calculating its effectiveness, searching for the possibility of reducing the cost of products manufactured by the enterprise, and 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: