What is the difference between variable and fixed costs. Fixed costs of production. Application of fixed and variable costs
There are several cost classifications enterprises: accounting and economic, explicit and implicit, permanent, variable and gross, returnable and non-returnable, etc.
Let's dwell on one of them, according to which all costs can be divided into fixed and variable. At the same time, it should be understood that such a division is possible only in the short term, since over long time periods all costs can be attributed to variables.
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What are fixed costs of production
fixed costs are the costs that a firm incurs regardless of whether it produces a product or not. This type of cost does not depend on the volume of products or services provided. Alternative names for these costs are overhead or sunk costs. The company ceases to bear this type of cost only in the event of liquidation.
Fixed Costs: Examples
Fixed costs in the short run can include the following types of expenses of the enterprise:
However, when calculating the average value fixed costs (this is the ratio of fixed costs to the volume of output), the amount of such costs per unit of output will be the lower, the greater the volume of production.
Variable and total costs
In addition, the company also has variable costs - this is the cost of raw materials and inventory, which are fully used within each production cycle. They are called variables because the amount of such costs is directly dependent on the volume of output.
Value fixed and variable costs during one production cycle is called gross or total costs. The whole set of expenses incurred by the enterprise that affect the cost of a unit of output is called the cost of production.
These indicators are necessary for financial analysis activities of the company, calculation of its efficiency, search for the possibility of reducing the cost of products manufactured by the enterprise, increasing the competitiveness of the organization.
Reducing average fixed costs can be achieved by increasing the volume of products or services provided. The lower this indicator, the lower the cost of products (services) and the higher the profitability of the company.
In addition, division into constants and variable costs 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:
There is a large number of ways in which the company makes a profit, while the fact of costs 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 production costs 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:
- room rental,
- deductions for depreciation,
- management and administrative staff costs,
- the cost of machines, machinery and equipment,
- security of premises for production,
- 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.
So, when determining the total costs (TC), a set of constant and variable costs. 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 the total fixed costs, which are calculated by dividing the 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 used in production processes resources, 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.
53. Fixed and variable costs
fixed costs- Costs that do not change depending on the volume of production. The source of fixed costs (overhead) are the costs of fixed resources.
The latter remain unchanged throughout short term Therefore, fixed costs do not depend on the volume of output. The plant may be idle because does not find a market for its products; mine - do not work due to workers' strikes.
But both the plant and the mine continue to incur fixed costs: they must pay interest on loans, insurance premiums, property taxes, pay the salaries of cleaners and watchmen; make utility payments.
The absence of a connection between output and fixed costs does not reduce the influence of the latter on the production process.
To understand this, it is enough to list the types of fixed costs.
These include many costs that determine the technological level of production. These are the costs of fixed capital in the form of depreciation, rental payments; expenditure on R&D and other know-how; payments for the use of patents.
Fixed costs are some costs of "human capital", including the payment of the "backbone" of the staff: key managers, accountants, or even skilled craftsmen - workers of rare specialties. The cost of training and advanced training of employees can also be considered fixed costs.
Fixed costs do not depend on the volume of production.
source variable costs are the costs of variable resources. The main share of these costs is associated with non-use of working capital.
They include the cost of purchasing raw materials, materials, components and semi-finished products, the payment of wages to production workers. The nature of variable costs are also transport costs, value added tax, various payments, if the contract establishes their value in the form of fixed costs.
As you know, in the short run, changes in output are associated with a decrease or increase in the cost of variable resources.
Therefore, variable costs rise as production increases.
Moreover, the nature of this growth depends on the return on the variable resource (more specifically, on whether it is increasing, constant or decreasing).
The sum of fixed and variable costs forms the gross (total) total costs in the short term:
TC = TFC + TVC
If the company does not produce products, then the gross total cost is equal to the amount of fixed costs. When increasing the volume of production gross costs increase by the amount of variable costs depending on the volume of production.
(Materials are given on the basis of: E.A. Tatarnikov, N.A. Bogatyreva, O.Yu. Butova. Microeconomics. Answers to exam questions: Tutorial for universities. - M.: Exam Publishing House, 2005. ISBN 5-472-00856-5)
Fixed costs (TFC), variable costs (TVC) and their schedules. Determination of total costs
In the short run, some resources remain unchanged, while others change to increase or decrease total output.
In accordance with this, the economic costs of the short-term period are divided into fixed and variable costs. AT long term this division is meaningless, since all costs can change (i.e., they are variable).
Fixed Costs (FC) are costs that do not depend in the short run on how much the firm produces. They represent the costs of its fixed factors of production.
Fixed costs include:
- - payment of interest on bank loans;
- - depreciation deductions;
- - payment of interest on bonds;
- - salaries of management personnel;
- - rent;
- - insurance payments;
Variable Costs(VC) These are costs that depend on the firm's output. They represent the costs of the firm's variable factors of production.
Variable costs include:
- - wage;
- - fare;
- - electricity costs;
- - the cost of raw materials and materials.
From the graph we see that the wavy line depicting variable costs rises with an increase in production volume.
This means that as production increases, variable costs increase:
initially they rise in proportion to the change in output (until point A is reached)
then savings in variable costs are achieved in mass production, and the rate of their growth decreases (until point B is reached)
the third period, reflecting the change in variable costs (moving to the right from point B), is characterized by an increase in variable costs due to a violation optimal sizes enterprises. This is possible with an increase in transportation costs due to the increased volumes of imported raw materials, volumes finished products to be shipped to the warehouse.
General (gross) costs (TC)- is all the costs at a given point in time, necessary for the production of a product. TC = FC + VC
Formation of the curve of average long-term costs, its schedule
The scale effect is a phenomenon of the long run, when all resources are variable. This phenomenon should not be confused with the known law of diminishing returns. The latter is a phenomenon of an extremely short period, when fixed and variable resources interact.
At constant prices for resources, economies of scale determine the dynamics of costs in the long run. After all, it is he who shows whether the increase in production capacity leads to a decrease or increase in returns.
It is convenient to analyze the efficiency of resource use in a given period using the long-term average cost function LATC. What is this feature? Suppose that the Moscow government decides to expand the city-owned AZLK plant. With the existing production capacity, cost minimization is achieved with a production volume of 100,000 vehicles per year. This state of affairs is shown by the short-run average cost curve ATC1 corresponding to a given scale of production (Fig. 6.15). Let the introduction of new models, which are planned to be released jointly with Renault, increase the demand for cars. The local design institute proposed two plant expansion projects corresponding to two possible scales of production. Curves ATC2 and ATC3 are short run average cost curves for this large scale of production. When deciding on the option to expand production, the plant management, in addition to taking into account financial opportunities investment, will take into account two main factors, the magnitude of demand and the value of the costs with which it is possible to produce the required volume of production. It is necessary to choose the scale of production that will ensure the satisfaction of demand at the lowest cost per unit of output.
ILong run average cost curve for a specific project
Here, the points of intersection of neighboring curves of short-term average costs (points A and B in Fig. 6.15) are of fundamental importance. Comparison of the volumes of production corresponding to these points and the magnitude of demand determines the need to increase the scale of production. In our example, if the amount of demand does not exceed 120 thousand cars per year, it is advisable to carry out production on a scale described by the ATC1 curve, i.e., at existing capacities. In this case, the achievable unit costs are minimal. If demand rises to 280,000 vehicles per year, then a plant with a production scale described by the ATC2 curve would be the most suitable. So, it is expedient to carry out the first investment project. If demand exceeds 280,000 vehicles per year, a second investment project will have to be implemented, i.e., to expand the scale of production to the size described by the ATC3 curve.
In the long term, there will be enough time to implement any possible investment project. Therefore, in our example, the long-run average cost curve will consist of successive segments of short-run average cost curves up to the points of their intersection with the next such curve (thick wavy line in Fig. 6.15).
Thus, each point of the long-run cost curve LATC determines the minimum achievable cost per unit of output at a given volume of production, taking into account the possibility of changing the scale of production.
In the limiting case, when a plant of the appropriate scale is built for any amount of demand, i.e., there are infinitely many curves of short-term average costs, the curve of long-term average costs from a wave-like one changes into a smooth line that envelops all curves of short-term average costs. Each point of the LATC curve is a point of contact with a certain ATCn curve (Fig. 6.16).
In the activity of any enterprise, the adoption of correct management decisions is based on the analysis of its performance indicators. One of the objectives of such an analysis is to reduce production costs, and, consequently, increase the profitability of the business.
Fixed and variable costs, their accounting is an integral part of not only the calculation of the cost of production, but also the analysis of the success of the enterprise as a whole.
The correct analysis of these articles allows you to take effective management decisions which have a significant impact on profits. For the purposes of analysis, in computer programs at enterprises, it is convenient to provide for automatic separation of costs into fixed and variable based on primary documents, in accordance with the principle adopted by the organization. This information is very important for determining the "break-even point" of the business, as well as assessing the profitability various kinds products.
variable costs
to variable costs include costs that are constant per unit of output, but their total amount is proportional to the volume of output. These include the cost of raw materials, expendable materials, energy resources involved in the main production, the salary of the main production personnel (together with accruals) and the cost transport services. These costs are directly related to the cost of production. In value terms, variable costs change when the price of goods or services changes. Unit variable costs, for example, for raw materials in the physical dimension, may decrease with an increase in production volumes due, for example, to a decrease in losses or costs for energy resources and transport.
Variable costs are either direct or indirect. If, for example, the enterprise produces bread, then the cost of flour is a direct variable cost, which increases in direct proportion to the volume of bread produced. Direct variable costs may decrease with the improvement of the technological process, the introduction of new technologies. However, if the plant refines oil and as a result receives in one technological process, for example, gasoline, ethylene and fuel oil, then the cost of oil for the production of ethylene will be variable, but indirect. Indirect variable costs in this case, it is usually taken into account in proportion to the physical volumes of production. So, for example, if during the processing of 100 tons of oil, 50 tons of gasoline, 20 tons of fuel oil and 20 tons of ethylene are obtained (10 tons are losses or waste), then the cost of 1.111 tons of oil (20 tons of ethylene + 2.22 tons of waste) is attributed to the production of one ton of ethylene /20 tons of ethylene). This is due to the fact that in a proportional calculation, 20 tons of ethylene account for 2.22 tons of waste. But sometimes all the waste is attributed to one product. For calculations, data from technological regulations are used, and for analysis, actual results for the previous period.
The division into direct and indirect variable costs is conditional and depends on the nature of the business.
Thus, the cost of gasoline for the transportation of raw materials during oil refining is indirect, and for transport company direct, since they are directly proportional to the volume of traffic. Wages production personnel with accruals are classified as variable costs with piecework wages. However, with time wages, these costs are conditionally variable. When calculating the cost of production, planned costs per unit of production are used, and in the analysis, actual costs, which may differ from planned costs, both upwards and downwards. Depreciation of fixed assets of production, referred to a unit of output, is also a variable cost. But this relative value is used only when calculating the cost of various types of products, since depreciation charges, in themselves, are fixed costs / costs.
