How to calculate gross costs. Marginal costs and marginal revenue of production. Detailed instructions for calculating variable costs
Production costs are the costs of purchasing economic resources consumed in the process of producing certain goods.
Any production of goods and services, as is known, is associated with the use of labor, capital and natural resources, which are factors of production, the value of which is determined by production costs.
Due to limited resources, the problem arises of how best to use them among all rejected alternatives.
Opportunity costs are the costs of producing goods, determined by the cost of the best lost opportunity to use production resources, ensuring maximum profit. The opportunity costs of a business are called economic costs. These costs must be distinguished from accounting costs.
Accounting costs differ from economic costs in that they do not include the cost of factors of production that are owned by the owners of firms. Accounting costs are less than economic costs by the amount of implicit earnings of the entrepreneur, his wife, implicit land rent and implicit interest on equity owner of the company. In other words, accounting costs are equal to economic costs minus all implicit costs.
The options for classifying production costs are varied. Let's start by distinguishing between explicit and implicit costs.
Explicit costs are opportunity cost, taking the form of cash payments to the owners of production resources and semi-finished products. They are determined by the amount of company expenses to pay for purchased resources (raw materials, materials, fuel, labor, etc.).
Implicit (imputed) costs are the opportunity costs of using resources that belong to the firm and take the form of lost income from the use of resources that are the property of the firm. They are determined by the cost of resources owned by a given company.
The classification of production costs can be carried out taking into account the mobility of production factors. Fixed, variable and total costs are distinguished.
Fixed costs (FC) are costs whose value in the short run does not change depending on changes in production volume. These are sometimes called "overhead" or "sunk costs". Fixed costs include the cost of maintaining industrial buildings, purchasing equipment, rental payments, interest payments on debts, salaries management personnel etc. All these expenses must be financed even when the company does not produce anything.
Variable costs (VC) are costs whose value changes depending on changes in production volume. If products are not produced, then they are equal to zero. Variable costs include the costs of purchasing raw materials, fuel, energy, transport services, wages workers and employees, etc. In supermarkets, payment for the services of supervisors is included in variable costs, since managers can adapt the volume of these services to the number of customers.
Total costs (TC) - the total costs of the company, equal to the sum of its constant and variable costs, are determined by the formula:
Total costs increase as production volume increases.
Costs per unit of goods produced take the form of average fixed costs, average variable costs and average total costs.
Average fixed cost (AFC) is the total fixed cost per unit of output. They are determined by dividing fixed costs (FC) by the corresponding quantity (volume) of products produced:
Since total fixed costs do not change, then when divided by an increasing volume of production, average fixed costs will fall as the quantity of output increases, because fixed amount costs are distributed over more and more units of output. Conversely, as production volume decreases, average fixed costs will increase.
Average variable cost (AVC) is the total variable cost per unit of output. They are determined by dividing variable costs by the corresponding quantity of output:
Average variable costs first fall, reaching their minimum, then begin to rise.
Average (total) costs (ATC) are the total production costs per unit of output. They are defined in two ways:
a) by dividing the sum of total costs by the number of products produced:
b) by summing average fixed costs and average variable costs:
ATC = AFC + AVC.
At the beginning, average (total) costs are high because the volume of output is small and fixed costs are high. As production volume increases, average (total) costs decrease and reach a minimum, and then begin to rise.
Marginal cost(MC) is the cost associated with producing an additional unit of output.
Marginal costs are equal to the change in total costs divided by the change in volume produced, that is, they reflect the change in costs depending on the quantity of output. Since fixed costs do not change, fixed marginal costs are always zero, i.e. MFC = 0. Therefore, marginal costs are always marginal variable costs, i.e. MVC = MC. It follows from this that increasing returns to variable factors reduce marginal costs, while decreasing returns, on the contrary, increase them.
Marginal costs show the amount of costs that a firm will incur when increasing production by the last unit of output, or the amount of money that it will save if production decreases by a given unit. When the additional cost of producing each additional unit of output is less than the average cost of the units already produced, producing that next unit will lower the average total cost. If the cost of the next additional unit is higher than average cost, its production will increase average total cost. The above applies to a short period.
In practice Russian enterprises and in statistics the concept of “cost” is used, which means monetary value current costs of production and sales of products. The costs included in the cost include costs for materials, overhead, wages, depreciation, etc. The following types of cost are distinguished: basic - the cost of the previous period; individual - the amount of production costs specific type products; transportation - costs of transporting goods (products); products sold, current - assessment of sold products at restored cost; technological - the amount of costs for organization technological process manufacturing products and providing services; actual - based on actual costs for all cost items for a given period.
G.S. Bechkanov, G.P. Bechkanova
A company's production costs can be divided into two categories: variable and fixed costs. Variable costs depend on changes in production volume, while constant costs remain fixed. Understanding the principle of classifying costs into fixed and variable is the first step to managing costs and improving production efficiency. Knowing how to calculate variable costs will help you reduce your unit costs, making your business more profitable.
Steps
Calculation of variable costs
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Identify combined costs. Sometimes some costs cannot be clearly classified as variable or fixed costs. Such costs may vary depending on the volume of production, but may also be present when production is at a standstill or there are no sales. Such costs are called combined costs. They can be broken down into fixed and variable components to more accurately determine the amount of fixed and variable costs.
Estimate costs according to the level of production activity. To break down combined costs into fixed and variable components, you can use the minimax method. This method estimates the combined costs of the months with the highest and lowest production volumes and then compares them to identify the variable cost component. To begin the calculation, you must first identify the months with the highest and lowest volume of manufacturing activity (output). For each month in question, record production activity in some measurable quantity (for example, machine hours expended) and the associated combined cost amount.
- Let's say that your company uses a waterjet cutting machine in production to cut metal parts. For this reason, your company has variable water costs for production, which depend on its volume. However, you also have constant water costs associated with maintaining your business (for drinking, utilities, and so on). In general, the costs for water in your company are combined.
- Let's say that in the month with the highest volume of production, your water bill was 9,000 rubles, and at the same time you spent 60,000 machine hours on production. And in the month with the lowest production volume, the water bill was 8,000 rubles, while 50,000 machine hours were spent.
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Calculate the variable cost per unit of production (VCR). Find the difference between the two values of both indicators (costs and production) and determine the value of variable costs per unit of production. It is calculated as follows: V C R = C − c P − p (\displaystyle VCR=(\frac (C-c)(P-p))), where C and c are costs for months with high and low production levels, and P and p are the corresponding levels of production activity.
Determine the total variable costs. The value calculated above can be used to determine the variable part of the combined costs. Multiply the variable costs per unit of production by the appropriate level of production activity. In the example under consideration, the calculation will be as follows: 0.10 × 50000 (\displaystyle 0.10\times 50000), or 5000 (\displaystyle 5000) rubles for the month with the lowest production volume, and 0.10 × 60000 (\displaystyle 0.10\times 60000), or 6000 (\displaystyle 6000) rubles for the month with the highest production volume. This will give you the total variable water costs for each month in question. Then their value can be subtracted from the total value of the combined costs and obtain the amount of fixed costs for water, which in both cases will be 3,000 rubles.
- The value of variable costs per unit of output above the industry average indicates that the company spends more money and resources (labor, materials, utilities) on production than its competitors. This may indicate its low efficiency or the use of too expensive resources in production. In any case, it will not be as profitable as its competitors unless it cuts its costs or increases its prices.
- On the other hand, a company that is able to produce the same goods at a lower cost is selling competitive advantage in receiving more profit from the established market price.
- This competitive advantage may be based on the use of cheaper materials, cheaper labor or more efficient production facilities.
- For example, a company that purchases cotton at a lower price than other competitors can produce shirts with lower variable costs and charge lower prices for the products.
- Public companies publish their reports on their websites, as well as on the websites of the exchanges on which their securities are traded. Information about their variable costs can be obtained through analysis of "Reports on financial results"of these companies.
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Conduct a break-even analysis. Variable costs (if known) combined with fixed costs can be used to calculate the break-even point for a new manufacturing project. The analyst is able to draw a graph of the dependence of fixed and variable costs on production volumes. With its help, he will be able to determine the most profitable level of production.
Classify costs into fixed and variable. Fixed costs are those costs that remain unchanged when production volume changes. For example, this could include rent and salaries of management personnel. Whether you produce 1 unit or 10,000 units in a month, these costs will remain approximately the same. Variable costs change with changes in production volume. For example, these include the costs of raw materials, packaging materials, product delivery costs and wages of production workers. The more products you produce, the higher your variable costs.
Add together all the variable costs for the time period under consideration. Having identified all variable costs, calculate their total value for the analyzed period of time. For example, your manufacturing operations are fairly simple and involve only three types of variable costs: raw materials, packaging and shipping costs, and worker wages. The sum of all these costs will be the total variable costs.
Divide total variable costs by production volume. If you divide the total amount of variable costs by the volume of production over the analyzed period of time, you will find out the amount of variable costs per unit of production. The calculation can be represented as follows: v = V Q (\displaystyle v=(\frac (V)(Q))), where v is the variable cost per unit of output, V is the total variable cost, and Q is the volume of production. For example, if in the above example the annual production volume is 500,000 units, then the variable cost per unit would be: 1550000 500000 (\displaystyle (\frac (1550000)(500000))), or 3, 10 (\displaystyle 3,10) ruble
Application of the minimax calculation method
Using variable cost information in practice
Assess trends in variable costs. In most cases, increasing production volume will make each additional unit produced more profitable. This is because fixed costs are spread over more units of output. For example, if a business that produced 500,000 units of product spent 50,000 rubles on rent, these costs in the cost of each unit of production amounted to 0.10 rubles. If the production volume doubles, then the rental costs per unit of production will already be 0.05 rubles, which will allow you to get more profit from the sale of each unit of goods. That is, as sales revenue increases, the cost of production also increases, but at a slower pace (ideally, in the unit cost of production, the variable costs per unit should remain unchanged, and the component of the fixed costs per unit should fall).
Use the percentage of variable costs in the cost price to assess risk. If you calculate the percentage of variable costs in the unit cost of production, you can determine the proportional ratio of variable and fixed costs. The calculation is made by dividing the variable costs per unit of production by the cost per unit of production using the formula: v v + f (\displaystyle (\frac (v)(v+f))), where v and f are respectively variable and fixed costs per unit of production. For example, if fixed costs per unit of production are 0.10 rubles, and variable costs are 0.40 rubles (with a total cost of 0.50 rubles), then 80% of the cost is variable costs ( 0.40 / 0.50 = 0.8 (\displaystyle 0.40/0.50=0.8)). Being third party investor to the company, you can use this information to assess the potential risk to the company's profitability.
Swipe comparative analysis with companies in the same industry. First, calculate your company's variable costs per unit. Then collect data on the value of this indicator from companies in the same industry. This will give you a starting point for assessing your company's performance. Higher variable costs per unit may indicate that a company is less efficient than others; whereas a lower value of this indicator can be considered a competitive advantage.
Every organization strives to achieve maximum profit. Any production incurs costs for the purchase of factors of production. At the same time, the organization strives to achieve such a level that a given volume of production is provided at the lowest possible cost. The firm cannot influence the prices of resources. But, knowing the dependence of production volumes on the number of variable costs, it is possible to calculate costs. Cost formulas will be presented below.
Types of costs
From an organizational point of view, expenses are divided into the following groups:
- individual (expenses specific enterprise) and social (costs of manufacturing a specific type of product incurred by the entire economy);
- alternative;
- production;
- general.
The second group is further divided into several elements.
Total expenses
Before studying how costs and cost formulas are calculated, let's look at the basic terms.
Total costs (TC) are general expenses for the production of a certain volume of products. IN short term a number of factors (for example, capital) do not change, some costs do not depend on output volumes. This is called total fixed costs (TFC). The amount of costs that changes with output is called total variable costs (TVC). How to calculate total costs? Formula:
Fixed costs, the calculation formula for which will be presented below, include: interest on loans, depreciation, insurance premiums, rent, salary. Even if the organization does not work, it must pay rent and loan debt. Variable expenses include salaries, costs of purchasing materials, paying for electricity, etc.
With an increase in output volumes, variable production costs, the calculation formulas for which were presented earlier:
- grow proportionally;
- slow down growth when reaching the maximum profitable production volume;
- resume growth due to violation of the optimal size of the enterprise.
Average expenses
Wanting to maximize profits, the organization seeks to reduce costs per unit of product. This ratio shows a parameter such as (ATS) average cost. Formula:
ATC = TC\Q.
ATC = AFC + AVC.
Marginal costs
The change in total costs when production volume increases or decreases by one unit shows marginal costs. Formula:
WITH economic point From a perspective, marginal costs are very important in determining the behavior of an organization in market conditions.
Relationship
Marginal cost must be less than total average cost (per unit). Failure to comply with this ratio indicates a violation of the optimal size of the enterprise. Average costs will change in the same way as marginal costs. It is impossible to constantly increase production volume. This is the law of diminishing returns. At a certain level, variable costs, the calculation formula for which was presented earlier, will reach their maximum. After this critical level, an increase in production volumes even by one will lead to an increase in all types of costs.
Example
Having information about the volume of production and the level of fixed costs, you can calculate everything existing species costs.
Issue, Q, pcs. | Total costs, TC in rubles | ||||||
Without engaging in production, the organization incurs fixed costs of 60 thousand rubles.
Variable costs are calculated using the formula: VC = TC - FC.
If the organization is not engaged in production, the amount of variable costs will be zero. With an increase in production by 1 piece, VC will be: 130 - 60 = 70 rubles, etc.
Marginal costs are calculated using the formula:
MC = ΔTC / 1 = ΔTC = TC(n) - TC(n-1).
The denominator of the fraction is 1, since each time the volume of production increases by 1 piece. All other costs are calculated using standard formulas.
Opportunity Cost
Accounting expenses are the cost of the resources used in their purchase prices. They are also called explicit. The amount of these costs can always be calculated and justified with a specific document. These include:
- salary;
- equipment rental costs;
- transportation costs;
- payment for materials, bank services, etc.
Economic costs are the cost of other assets that could be obtained from alternative uses of resources. Economic costs = Explicit + Implicit costs. These two types of expenses most often do not coincide.
Implicit costs include payments that a firm could receive if it used its resources more profitably. If they were bought at competitive market, then their price would be the best among the alternatives. But pricing is influenced by the state and market imperfections. Therefore, the market price may not reflect the true cost of the resource and may be higher or lower than the opportunity cost. Let us analyze in more detail the economic costs and cost formulas.
Examples
An entrepreneur, working for himself, receives a certain profit from his activities. If the sum of all expenses incurred is higher than the income received, then the entrepreneur ultimately suffers a net loss. It, together with net profit, is recorded in documents and refers to explicit costs. If an entrepreneur worked from home and received an income that exceeded his net profit, then the difference between these values would constitute implicit costs. For example, an entrepreneur receives a net profit of 15 thousand rubles, and if he were employed, he would have 20,000. In this case, there are implicit costs. Cost formulas:
NI = Salary - Net profit= 20 - 15 = 5 thousand rubles.
Another example: an organization uses in its activities premises that belong to it by right of ownership. Explicit expenses in this case include the amount of utility costs (for example, 2 thousand rubles). If the organization rented out this premises, it would receive an income of 2.5 thousand rubles. It is clear that in this case the company would also pay utility bills monthly. But she would also receive net income. There are implicit costs here. Cost formulas:
NI = Rent - Utilities = 2.5 - 2 = 0.5 thousand rubles.
Returnable and sunk costs
The cost for an organization to enter and exit a market is called sunk costs. Expenses for registering an enterprise, obtaining a license, payment advertising campaign no one will return it, even if the company goes out of business. In a narrower sense, sunk costs include costs of resources that cannot be used in alternative ways, such as the purchase of specialized equipment. This category of expenses does not relate to economic costs and does not affect the current state of the company.
Costs and price
If the organization's average costs are equal to the market price, then the firm makes zero profit. If favorable conditions increase the price, the organization makes a profit. If the price corresponds to the minimum average costs, then the question arises about the feasibility of production. If the price does not cover even the minimum variable costs, then the losses from the liquidation of the company will be less than from its functioning.
International distribution of labor (IDL)
The world economy is based on MRI - the specialization of countries in the production individual species goods. This is the basis of any type of cooperation between all states of the world. The essence of MRI is revealed in its division and unification.
One production process cannot be divided into several separate ones. At the same time, such a division will make it possible to unite separate industries and territorial complexes and establish interconnections between countries. This is the essence of MRI. It is based on the economically advantageous specialization of individual countries in the production of certain types of goods and their exchange in quantitative and qualitative ratios.
Development factors
The following factors encourage countries to participate in MRI:
- Volume domestic market. U large countries there is greater opportunity to find the necessary factors of production and less need to engage in international specialization. At the same time, market relations are developing, import purchases are compensated by export specialization.
- The lower the state's potential, the greater the need to participate in MRT.
- The country's high supply of monoresources (for example, oil) and low level of mineral resources encourage active participation in MRT.
- The greater the share of basic industries in the structure of the economy, the less the need for MRI.
Each participant finds economic benefit in the process itself.
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 ( F.C. ) - 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 expenses.
Because As production volume increases, total revenue increases, then average fixed costs (AFC) represent a decreasing value.
Variable costs ( V.C. ) - 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 ( M.C. ) 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.
Marginal cost() are the costs associated with producing an additional unit of output.
MC = ΔTC / ΔQ
Marginal cost reflects the change in costs that would result from increasing or decreasing production by one unit.
Comparison of average and marginal production costs is important information for managing a company, determining the optimal size of production. At point B, the supply price coincides with average and marginal costs. This point represents the firm's equilibrium.
When moving from point B to the right, an increase in production leads to a decrease in profit, because additional costs increase for each unit of goods. Going beyond point B leads to instability of the company's finances and in the end its behavior will be determined by flight from market structures.
Marginal Revenue
In modern market economy Calculating production efficiency involves comparing marginal revenue and marginal costs.
There are two ways to determine the best production volumes. Both of them are based on a comparison of marginal revenue and marginal cost.
1st method: accounting and analytical
How to determine the marginal cost of producing the third product? To answer this question, we take column 4 indicating gross costs. With the transition from the second product to the production of the third, costs increased (355-340 = 15). This is the marginal cost associated with the production of the third product.
The most profitable production volume is at the 6th position, after which marginal costs already exceed marginal revenue, which is clearly unfavorable for the company.
2nd method: graphic
It is based on a comparison of marginal costs and marginal revenue.
The guidelines for the company are as follows:- If marginal revenue is higher than marginal cost, production can be expanded.
- if marginal revenue is less than marginal cost, production is unprofitable and must be curtailed.
The equilibrium point of the firm and maximum profit is achieved when marginal revenue and marginal costs are equal.
Equilibrium of the firm under conditions perfect competition, when she chooses the optimal output, assumes the following equality:
P = MS + MR
where: P is the price of the product, MC is the marginal cost, MR is the marginal revenue.
Average costs
In order to more clearly determine the possible production volumes at which it protects itself from excessive growth, the dynamics of average costs is examined.
If gross costs are related to the number of products produced, we get average costs(curve).
Average fixed costs- represent fixed costs per unit of production.
Average variable costs- represent variable costs per unit of production.
Unlike average constants, average variable costs can either decrease or increase as output volumes increase, which is explained by the dependence of total variable costs on production volume. Average variable costs!!AVC?? reach their minimum at a volume that provides the maximum value of the average product.
Let us prove this position:
Average variable cost (by definition), but
and the output volume is .
Thus,
If , then , , which is what needed to be proved.
Average total costs (total) costs - show the total costs per unit of production.
The firm's costs in the long run
In the long run all the firm's resources are variable. The company can hire new equipment, rent new workshops, change the composition of management personnel, use new technology production.
The lack of permanent resources in the long term leads to the fact that the difference between fixed and variable costs disappears. Analysis of the long-term activities of the company is carried out through consideration of the dynamics long-run average cost (LATC). And the main goal of the company in the area of costs can be considered the organization of production of the “required scale”, providing a given volume of production with minimum average costs.
Long-run average costs
To construct long-term average costs, we assume that a company can organize production of three sizes: small, medium and large, each of which has its own short-term average cost curve (SATC1, SATC2, SATC3, respectively), as shown in Fig. 1.
Rice. 1. Long-run average cost curve
The choice of a particular project will depend on estimates of projected market demand on the company's products and on what capacity is needed to provide it.
If the forecasted demand corresponds to Q1, then the firm will prefer to create small production, since its average costs in this case will be significantly lower than at a larger one. large enterprises. As can be seen in Fig. 1,
ATC1(Q1)2(Q1),
and accordingly
ATC1(Q1)3(Q1).
If demand is expected to be Q2, then project 2 (medium enterprise) will be most preferable, providing lower costs, or
ATC2(Q2)1(Q2),
ATC2(Q2)3(Q3).
Similarly, when estimating demand in Q3, the firm will select a large-sized plant.
Combining sections of three curves short term costs, providing optimal production sizes for each output volume, shows us the firm's long-term average cost curve. In Fig. 1 it is represented by a solid line.
Long-Run Average Cost Curve shows the minimum cost per unit of output produced at each possible output level.
If the number of possible sizes ( Q1, Q2,...Qn) approaches infinity (n → ∞), then the long-term average cost curve becomes smoother, as shown in Fig. 2.
Rice. 2. Long-term average cost curve for an unlimited number of possible enterprise sizes
In this case, all points on the LATC curve are the lowest average cost for a given level of production, provided that the firm has enough time to change all the necessary inputs.
Minimum effective enterprise size
Long-run average cost analysis reveals optimal size enterprises (Q*), i.e. the size of production that ensures the minimum cost per unit of output in a given area of production. If the LATC curve has a horizontal section, as is the case in Fig. 2, then enterprises of several sizes can be considered equally effective.
The smallest plant size that allows a firm to minimize its long-run average cost is called minimum effective enterprise size.
Depending on the specifics of production and technological features, the minimum effective size can vary within very different limits. Thus, it is estimated that in the production of footwear this figure is 0.2% of the total output of the industry, in the production of cigarettes - 6.6%, and in the production of cars - 11%.
If the minimum efficient size of one enterprise provides almost 100% of the market needs for a given product, then the company that owns such an enterprise turns out to be natural monopolist(more details in the topic "Pure monopoly").
Comparison of short-run and long-run average cost curves
Average costs in both the long and short term represent the firm's costs per unit of output and are calculated using the same formula:
ATC=TC/Q.
However, there are also fundamental differences:
if in the short run average total costs are divided into average fixed and average variable costs
SATC=AVC+AFC,
then in the long run this division does not take place, since all costs are variable;
in the short term, U-shaped curves ATC And AVC determined law of diminishing returns variable resource; in the long run, when all resources are variable, the shape of the curves LATC determined by ;
for a rationally operating firm choosing the optimal enterprise size, long-term average costs are always less than or equal to (in other words, no more) than short-term average costs,
SATC≤LATC (Q*)
Where Q*- optimal production size.
Graphically, this means that the long-term cost curve bends around the short-term cost curves from below.
Economies of scale- Main article:
