Let's talk about the fixed costs of the enterprise: what economic sense does this indicator how to use and analyze it.
Fixed costs. Definition
fixed costs(Englishfixedcost,FC,TFC ortotalfixedcost) is a class of enterprise costs that are not related (do not depend) on the volume of production and sales. At each moment of time they are constant, regardless of the nature of the activity. Fixed costs combined with variables, which are the opposite of fixed costs, constitute the total costs of the enterprise.
Formula for calculating fixed costs/costs
The table below lists possible fixed costs. In order to better understand fixed costs, we compare them with each other.
fixed costs= Cost of wages + Rent of premises + Depreciation + Property taxes + Advertising;
Variable costs = Costs for raw materials + Materials + Electricity + Fuel + Bonus part of salary;
General costs= Fixed costs + Variable costs.
It should be noted that fixed costs are not always fixed, because an enterprise, with the development of its capacities, can increase production areas, the number of personnel, etc. As a result, fixed costs will also change, which is why management accounting theorists call them ( semi-fixed costs). Similarly, for variable costs - conditionally variable costs.
An example of calculating fixed costs in an enterprise inexcel
We will show clearly the differences between fixed and variable costs. To do this, in Excel, fill in the columns with "production volume", "fixed costs", "variable costs" and "total costs".
Below is a graph comparing these costs with each other. As we can see, with an increase in production, the constants do not change with time, but the variables increase.
Fixed costs do not change only in short term. In the long run, any costs become variable, often due to the impact of external economic factors.
Two Methods for Calculating Costs in an Enterprise
In the production of products, all costs can be divided into two groups according to two methods:
- fixed and variable costs;
- indirect and direct costs.
It should be remembered that the costs of the enterprise are the same, only their analysis can be carried out using different methods. In practice, fixed costs are strongly intersected with such a concept as indirect costs or overhead costs. As a rule, the first method of cost analysis is used in management accounting, and the second in accounting.
Fixed costs and the break-even point of the enterprise
Variable costs are part of the break-even point model. As we determined earlier, fixed costs do not depend on the volume of production / sales, and with an increase in output, the enterprise will reach a state where the profit from the sold products will cover variable and fixed costs. This state is called the break-even point or critical point, when the company becomes self-sufficient. This point is calculated in order to predict and analyze the following indicators:
- at what critical volume of production and sales the enterprise will be competitive and profitable;
- how much sales need to be made in order to create a zone of financial security for the enterprise;
Marginal profit (income) at the break-even point coincides with the fixed costs of the enterprise. Domestic economists often use the term instead of marginal profit gross income. The more contribution margin covers fixed costs, the higher the profitability of the enterprise. You can study the break-even point in more detail in the article ““.
Fixed costs in the balance sheet of the enterprise
Since the concepts of fixed and variable costs of the enterprise refer to management accounting, then there are no lines in the balance sheet with such names. In accounting (and tax accounting), the concepts of indirect and direct costs are used.
In the general case, fixed costs include balance lines:
- Cost of goods sold - 2120;
- Commercial expenses - 2210;
- Management (general) - 2220.
The figure below shows the balance sheet of OJSC “Surgutneftekhim”, as we can see, fixed costs change every year. The fixed cost model is a purely economic model, and it can be used in the short run, when revenue and output change linearly and regularly.
Let's take another example - OJSC ALROSA and look at the dynamics of changes in conditionally fixed costs. The figure below shows how costs have changed from 2001 to 2010. It can be seen that the costs were not constant over 10 years. The most sustainable costs throughout the period were business expenses. The rest of the costs have changed in one way or another.
Summary
Fixed costs are costs that do not change with the volume of production of the enterprise. This type cost is used in management accounting to calculate the total costs and determine the break-even level of the enterprise. Since the company operates in a constantly changing external environment, then fixed costs in the long run also change and therefore in practice they are often called conditionally fixed costs.
Variable costs are the company's expenses spent on the production or sale of goods and services, the amount of which varies depending on the volume of production. This indicator is used to calculate the possibility of reducing the costs of the enterprise.
The main purpose of calculating variable costs
Any economic indicator serves a single purpose - to increase the profitability of the enterprise. Variable costs are no exception. They allow you to analyze the company's activities and develop a strategy to increase profitability. Accordingly, this indicator is absent in the balance sheet, since it is needed not for accounting, but for management accounting.
Important! A clear distinction should be made between fixed and variable costs. The first are those whose amount does not change for a long time. For example, office rent, tuition fees, retraining of employees of the enterprise and other fixed costs.
The main types of variable costs
First of all, variable costs are divided into two main subgroups:
- Direct- these are expenses that are directly related to the cost of goods (services). For example, the cost of materials, wages, etc.
- Indirect- these are expenses related to the cost of a group of goods (services). For example, general factory, general warehouse and other types of general costs that affect the cost of all goods or their individual groups.
Some businessmen believe that variable costs are proportional to the volume of production. However, this is not always the case. According to the volume of production, variable costs are divided into three types:
- Progressive. This is a type of cost in which costs increase faster than the growth in sales or production of goods.
- Regressive. With this type of cost, the costs lag behind the pace of production or sales.
- Proportional. This is precisely the case when the increase in costs is directly proportional to the increase in production volumes.
Consider an example of changing variable costs by production volume:
You can also distinguish the type of costs by interconnection with the production process:
- Production costs are costs that are directly related to the goods produced. For example, raw materials, consumables, energy, wages, etc.
- Non-production costs are costs that are not directly related to the production of products. For example, transportation, storage, commission payments to dealers and other types of indirect costs.
Accordingly, variable costs include:
- Piecework bonus payments to employees (bonuses, commissions, percentages of sales, etc.);
- travel and other related payments;
- costs of storage, transportation and warehousing of goods;
- outsourcing and other types of services used to service production;
- taxes for the manufacture and / or sale of goods and services;
- payment for fuel, energy, water and other utility bills;
- the cost of purchasing raw materials and Supplies for the production of products.
Detailed instructions for calculating variable costs
To calculate costs, you need to determine the material costs for the production of products. This is done on the basis of the following documents:
- reports on the write-off of raw materials, consumables and other materials for the production of goods;
- acts of work performed on the main and auxiliary production processes;
- reports of outsourcing companies involved in the production of products;
- returns for waste materials.
Important! The amount of material costs includes data only on the first three items from this list. The last point (on the return of waste) is deducted from the amount of costs.
Then you need to determine the amount of costs for paying the variable part of salaries to employees of the enterprise. This includes premiums, interest, commissions, allowances, payments to the Social Insurance Fund and other types of additional payments.
Based on the data on actual consumption and prices set in the region of production, the amount of costs for utility costs and fuel is determined.
After that, the sum of the costs for packaging, storage and delivery of products is calculated. This can be done based on internal documents company or reports of third parties responsible for these stages of work.
After all this, the amount of tax costs is determined on the basis of declarations or accounting reports of the company.
Important! Please note that reducing the variable costs of taxes, fees and other obligatory payments is possible only if appropriate changes are made to federal or regional legislative acts. However, in the calculation they must be taken into account without fail.
Formula for calculating variable costs
The easiest way to calculate variable costs is to simply add up all the costs and then divide by the volume of goods produced during the analyzed period of time. The calculation formula is:
PI \u003d (VI¹ + VI² + VI∞) ÷ OP, where:
- PI - variable costs;
- VI - type of costs (fuel, taxes, bonuses, etc.);
- OP is the volume of production.
Variable Cost Example
In 2017, Romashka LLC spent on the production and sale of products:
- 350 thousand rubles for the purchase of materials;
- 150 thousand rubles for packaging and storage of goods;
- 450 thousand rubles to pay taxes;
- 750 thousand rubles for piecework bonus payments to employees.
Accordingly, the total amount of variable costs amounted to 1.7 million rubles. (350 thousand rubles + 150 thousand rubles + 450 thousand rubles + 750 thousand rubles). The volume of production amounted to 500 thousand units of goods. Accordingly, the variable costs per unit of production amounted to:
RUB 1.7 million ÷ 500 thousand units = 3 rubles 40 kop.
Production costs - the cost of purchasing economic resources consumed in the process of issuing certain goods.
Any production of goods and services, as you know, is associated with the use of labor, capital and natural resources, which are factors of production whose value is determined by production costs.
Due to the limited resources, the problem arises of how best to use them from all the rejected alternatives.
Opportunity costs are the costs of issuing goods, determined by the cost of the best lost opportunity to use production resources, providing maximum profit. The opportunity cost of a business is called economic cost. These costs must be distinguished from accounting costs.
Accounting costs differ from economic costs in that they do not include the value of factors of production owned by firm owners. 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 the owner of the firm. In other words, accounting costs are equal to economic costs minus all implicit costs.
Variants of classification of production costs are diverse. Let's start by distinguishing between explicit and implicit costs.
Explicit costs are opportunity cost, taking the form of cash payments to owners of production resources and semi-finished products. They are determined by the amount of expenses of the company to pay for the purchased resources (raw materials, materials, fuel, work force etc.).
Implicit (imputed) costs are the opportunity costs of using resources that are owned by the firm and take the form of lost income from the use of resources owned by the firm. They are determined by the cost of resources owned by the firm.
The classification of production costs can be carried out taking into account the mobility of production factors. There are fixed, variable and general costs.
Fixed costs (FC) - costs, the value of which in the short period does not change depending on changes in the volume of production. These are sometimes referred to as "overhead costs" or "sunk costs". Fixed costs include the cost of maintaining industrial buildings, the purchase of equipment, rent payments, interest payments on debts, salaries. management personnel etc. All these expenses must be financed even when the firm does not produce anything.
Variable costs (VC) - costs, the value of which varies depending on changes in the volume of production. If production is not produced, then they are equal to zero. Variable costs include the cost of purchasing raw materials, fuel, energy, transport services, salaries of workers and employees, etc. In supermarkets, the payment for the services of supervisors is included in variable costs, since managers can adjust 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 fixed and variable costs, are determined by the formula:
Total costs increase as the volume of production increases.
The cost per unit of goods produced is in 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 output:
Since total fixed costs do not change, when divided by an increasing volume of production, average fixed costs will fall as the quantity of output increases, since a fixed amount of costs is distributed over more and more units of production. Conversely, if output decreases, average fixed costs will rise.
Average variable cost (AVC) is the total variable cost per unit of output. They are determined by dividing the variable costs by the corresponding amount of output:
Average variable costs first fall, reaching their minimum, then begin to rise.
Average (total) costs (ATS) are the total costs of production per unit of output. They are defined in two ways:
a) by dividing the sum of total costs by the quantity of goods produced:
b) by summing average fixed costs and average variable costs:
ATC = AFC + AVC.
Initially, the average (total) cost is high because the output is small and the fixed costs are high. As the volume of production 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 cost is equal to the change in total costs divided by the change in the volume of output, that is, they reflect the change in costs depending on the amount 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 falling returns, on the contrary, increase them.
Marginal cost shows the amount of costs that the firm will incur if the production of the last unit of output increases, or the money that it saves if production decreases by this unit. If the incremental cost of producing each additional unit of output is less than the average cost of the units already produced, the production of that next unit will lower the average total cost. If the cost of the next additional unit is higher than the average cost, its production will increase the average total cost. The foregoing refers to a short period.
In practice Russian enterprises and in statistics, the concept of "cost" is used, which is understood as the monetary expression of the current costs of production and sales of products. Costs included in the cost price include materials, overheads, wage, depreciation, etc. There are the following types of cost: basic - the cost of the past period; individual - the amount of costs for the manufacture of a particular type of product; transportation - the cost of transporting goods (products); of sold products, current - assessment of sold products at the restored cost; technological - the amount of costs for the organization technological process production of products and provision of services; actual - based on the data of actual costs for all cost items for a given period.
G.C. Vechkanov, G.R. Bechkanova
Allows you to calculate the minimum price of goods / services, determine the optimal sales volume and calculate the value of the company's expenses. There are various methods for calculating the types of costs, the main ones are given below.
Production Costs - Calculation Formulas
The calculation of production costs is easily performed on the basis of cost estimates. If such forms are not compiled in the organization, data from the reporting period will be required. accounting. It should be borne in mind that all costs are divided into fixed (the value is unchanged over the period) and variable (the value varies depending on the volume of production).
Total production costs - formula:
Total costs = Fixed costs + Variable costs.
This method of calculation allows you to find out the total costs for the entire production. Detailing is carried out by departments of the enterprise, workshops, product groups, types of products, etc. An analysis of indicators in dynamics will help predict the value of production or sales, expected profit / loss, the need to increase capacity, and the inevitability of reducing expenditures.
Average production costs - formula:
Average costs \u003d Total costs / Volume of manufactured products / services performed.
This indicator is also called the total cost of the product/service. Allows you to determine the level of the minimum price, calculate the efficiency of investing resources for each unit of production, compare mandatory costs with prices.
Marginal cost of production - formula:
Marginal Costs = Change in Total Costs / Change in Output.
The indicator of the so-called additional costs allows you to determine the increase in the cost of issuing an additional volume of GP in the most profitable way. At the same time, the value of fixed costs remains unchanged, variable costs increase.
Note! In accounting, the expenses of the enterprise are reflected in the expense accounts - 20, 23, 26, 25, 29, 21, 28. To determine the costs for the required period, you should sum up the debit turnovers on the accounts involved. Exceptions are internal turnovers and balances at refineries.
How to calculate production costs - an example
|
GP output volume, pcs. |
Total costs, rub. |
Average costs, rub. |
Fixed costs, rub. |
Variable costs, rub. |
From the above example, it can be seen that the organization incurs fixed costs in the amount of 1200 rubles. in any case - in the presence or absence of production of goods. Variable costs for 1 pc. initially amount to 150 rubles, but the costs are reduced with the growth of production. This can be seen from the analysis of the second indicator - Average costs, the decrease of which occurred from 1350 rubles. up to 117 rubles. per 1 unit finished product. Marginal cost calculation can be determined by dividing the increase in variable costs by 1 unit of product or by 5, 50, 100, etc.
Not a single production, even the most modern, can do without costs. AT this case costs are used in production different kinds resources (raw materials, energy, labor, etc.) that have a cost form. At the same time, there is still no single concept of this economic category. For the purposes of the analysis, there are several bases for classifying costs. For example, in the case of the accounting approach, costs are the actual costs of various production resources for the production of products at the cost of their purchase by the enterprise and form the cost of production.
Regarding the volume of output in the short run of the firm's activity, fixed, variable, general, average and marginal costs can be distinguished.
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A feature of fixed costs (FC) is that their value does not depend on the volume of production: for example, a firm must pay interest on a loan received, regardless of whether it produces products or not. A feature of variable costs (VC) is the dependence of their total value on the volume of production - the larger the volume of output, the more the company spends, for example, raw materials. The sum of constants and variable costs forms the total (or gross) costs of the firm, i.e. TC = FC + VC.
Not only data on the total value of one or another type of cost are important, but also their volume per unit of production, for which average costs are calculated: general (gross), fixed and variable. The volume of output at which the value of the average gross cost is the smallest is the optimal (most profitable) volume of production for the company in terms of costs.
Also, the firm needs to control its marginal cost (MC), which shows what costs the firm will incur if it produces one more unit (or, accordingly, the amount of savings in reducing output per unit). Marginal cost MC is the additional cost required to produce an additional unit of output. The value of marginal cost is not affected by the amount of fixed costs, it depends on changes in variable costs.