In practice, the concept of production costs is usually used. This is due to the difference between the economic and accounting meaning of costs. Indeed, for an accountant, costs are actually spent amounts of money, documented costs, i.e. expenses.
costs as economic term, includes both the actual amount of money spent and the lost profits. By investing money in any investment project, the investor loses the right to use it in another way, for example, to invest in a bank and receive a small, but stable and guaranteed, unless, of course, the bank goes bankrupt, interest.
The best use of available resources is called economic theory opportunity cost or opportunity cost. It is this concept that distinguishes the term "costs" from the term "costs". In other words, costs are costs reduced by the amount of the opportunity cost. Now it becomes obvious why in modern practice it is the costs that form the cost and are used to determine taxation. After all, the opportunity cost is a rather subjective category and cannot reduce taxable income. Therefore, the accountant deals with costs.
However, for economic analysis opportunity cost are of fundamental importance. It is necessary to determine the lost profit, and “is the game worth the candle?” It is precisely on the basis of the concept of opportunity costs that a person who is able to create his own business and work "for himself" may prefer a less complex and nervous type of activity. It is on the basis of the concept of opportunity cost that one can draw a conclusion about the expediency or inexpediency of making certain decisions. It is no coincidence that when determining the manufacturer, contractor and subcontractor, a decision is often made to declare open competition, and when evaluating investment projects in conditions where there are several projects, and some of them need to be postponed for a certain time, the lost profit coefficient is calculated.
Fixed and variable costs
All costs, minus alternative costs, are classified according to the criterion of dependence or independence from the volume of production.
Fixed costs are costs that do not depend on the volume of output. They are designated FC.
Fixed costs include the cost of paying technical staff, security of premises, product advertising, heating, etc. Fixed costs also include depreciation charges (for the restoration of fixed capital). To define the concept of depreciation, it is necessary to classify the assets of an enterprise into fixed and working capital.
Fixed capital is capital that transfers its value to finished products in parts (the cost of a product includes only a small part of the cost of the equipment with which the production of this product is carried out), and the value expression of the means of labor is called the main production assets. The concept of fixed assets is broader, since they also include non-production assets that may be on the balance sheet of an enterprise, but their value is gradually lost (for example, a stadium).
Capital that transfers its value to the finished product during one revolution, spent on the purchase of raw materials and materials for each production cycle called turnover. Depreciation is the process of transferring the value of fixed assets to finished products in parts. In other words, equipment sooner or later wears out or becomes obsolete. Accordingly, it loses its usefulness. This also happens due to natural causes (use, temperature fluctuations, structural wear, etc.).
Depreciation deductions are made on a monthly basis based on the depreciation rates established by law and the balance sheet value of fixed assets. Depreciation rate - the ratio of the amount of annual depreciation deductions to the cost of fixed production assets, expressed as a percentage. The state establishes various depreciation rates for certain groups of fixed production assets.
There are the following depreciation methods:
Linear (equal deductions over the entire life of the depreciable property);
Decreasing balance method (depreciation is charged from the entire amount only in the first year of equipment service, then accrual is made only from the untransferred (remaining) part of the cost);
Cumulative, by the sum of the numbers of years of useful life (a cumulative number is determined representing the sum of the numbers of years of useful life of the equipment, for example, if the equipment is depreciated over 6 years, then the cumulative number will be 6+5+4+3+2+1=21; then the price of the equipment is multiplied by the number of years of useful use and the resulting product is divided by the cumulative number, in our example, for the first year, depreciation deductions for equipment costing 100,000 rubles will be calculated as 100,000 x 6/21, depreciation deductions for the third year will be 100,000 x 4 / 21, respectively);
Proportional, proportional to output (determined by depreciation per unit of output, which is then multiplied by the volume of production).
With the rapid development of new technologies, the state can apply accelerated depreciation, which allows for more frequent replacement of equipment in enterprises. In addition, accelerated depreciation can be made as part of state support small business entities (depreciation deductions are not subject to income tax).
Variable costs are costs that are directly related to the volume of production. They are designated VC. Variable costs include the cost of raw materials and materials, piecework wages workers (it is calculated based on the volume of products produced by the employee), part of the cost of electricity (since electricity consumption depends on the intensity of the equipment) and other costs that depend on the volume of products produced.
The sum of constants and variable costs is the gross cost. Sometimes they are called complete or general. They are referred to as TS. It is not difficult to imagine their dynamics. It is enough to raise the variable cost curve by the amount of fixed costs, as shown in Fig. one.
Rice. 1. Production costs.
The ordinate shows fixed, variable and gross costs, the abscissa shows the volume of output.
When analyzing gross costs, it is necessary to pay special attention to their structure and its change. Comparison of gross costs with gross income is called gross performance analysis. However, for a more detailed analysis, it is necessary to determine the relationship between costs and output. For this, the concept of average costs is introduced.
Average costs and their dynamics
Average costs are the costs of producing and selling a unit of output.
Average total cost (average gross cost, sometimes referred to simply as average cost) is determined by dividing total cost by the quantity produced. They are designated ATS or simply AC.
Average variable costs are determined by dividing the variable costs by the amount of output produced.
They are designated AVC.
Medium fixed costs determined by dividing fixed costs by the quantity of goods produced.
They are designated AFC.
Naturally, average total cost is the sum of average variable and average fixed costs.
Initially, the average cost is high, because starting a new production involves certain fixed costs, which are high per unit of output at the initial stage.
Gradually, average costs decrease. This is due to the increase in output. Accordingly, with an increase in the volume of production per unit of output, there are less and less fixed costs. In addition, the growth in production makes it possible to purchase the necessary materials and tools in large quantities, and this, as you know, is much cheaper.
However, after a while, variable costs begin to rise. This is due to the decreasing ultimate performance production factors. The growth of variable costs causes the beginning of the growth of average costs.
However, the minimum average cost does not mean the maximum profit. At the same time, the analysis of the dynamics of average costs is of fundamental importance. It allows:
Determine the volume of production corresponding to the minimum cost per unit of output;
Compare the cost per unit of output with the price of a unit of output in the consumer market.
On fig. Figure 2 shows a variant of the so-called marginal firm: the price line touches the average cost curve at point B.
Rice. 2. Point of zero profit (B).
The point where the price line touches the average cost curve is usually called the zero profit point. The firm is able to cover the minimum costs per unit of output, but the possibilities for the development of the enterprise are extremely limited. From the point of view of economic theory, the firm does not care whether to stay in the industry, or leave it. This is due to the fact that at this point the owner of the enterprise receives a normal reward for the use of his own resources. From the point of view of economic theory, the normal profit, considered as the return on capital at the best alternative use of capital, is part of the costs. Therefore, the average cost curve also includes opportunity costs (it is easy to guess that under conditions of pure competition in the long run, entrepreneurs receive only the so-called normal profit, and there is no economic profit). The analysis of average costs needs to be supplemented by research marginal cost.
The Concept of Marginal Cost and Marginal Revenue
Average costs characterize the costs per unit of output, gross costs characterize the costs in general, and marginal costs make it possible to explore the dynamics of gross costs, try to anticipate negative trends in the future, and ultimately draw a conclusion about the most optimal variant of the production program.
Marginal cost is the incremental cost incurred by producing an additional unit of output. In other words, marginal cost is the increase in gross cost per unit increase in production. Mathematically, we can define marginal cost as follows:
MC = ∆TC / ∆Q.
Marginal cost shows whether the production of an additional unit of output makes a profit or not. Consider the dynamics of marginal costs.
Initially, marginal costs are reduced, remaining below average. This is due to the reduction in unit costs due to the positive economies of scale. Then, just like averages, marginal costs begin to rise.
Obviously, the production of an additional unit of output also gives an increase in total income. To determine the increase in income due to an increase in production, the concept is used marginal income or marginal revenue.
Marginal revenue (MR) is the additional revenue generated by increasing production by one unit:
MR = ∆R / ∆Q,
where ΔR is the change in the company's income.
By subtracting marginal cost from marginal revenue, we obtain marginal profit (it can also be negative). It is obvious that the entrepreneur will increase the volume of production as long as he remains able to receive marginal profit, despite its decrease due to the law of diminishing returns.
Source - Golikov M.N. Microeconomics: teaching aid for universities. - Pskov: Publishing House of PSPU, 2005, 104 p.
Cost price- the initial cost of those costs incurred by the enterprise for the production of a unit of output.
Price- the monetary equivalent of all types of costs, including some types of variable costs.
Price- the market equivalent of the generally accepted value of the product offered.
production costs- these are expenses, cash expenditures that must be made to create. For (the company) they act as payment for acquired.
Private and public costs
Costs can be viewed from different perspectives. If they are examined from the point of view of an individual firm (individual producer), we are talking about private costs. If the costs are analyzed from the point of view of society as a whole, then there is, as a consequence, the need to take into account social costs.
Let us clarify the concept of external effects. In market conditions, a special relationship of sale and purchase arises between the seller and the buyer. At the same time, relations arise that are not mediated by the commodity form, but that have a direct impact on people's well-being (positive and negative externalities). An example of positive externalities is spending on R&D or training of specialists, an example of a negative externality is compensation for damage from environmental pollution.
Public and private costs coincide only in the absence of external effects, or if their total effect is equal to zero.
Public costs = Private costs + Externalities
Fixed Variables and Total Costs
fixed costs- this is a type of cost that an enterprise incurs within one. Determined by the company itself. All these costs will be typical for all cycles of production of goods.
variable costs are those types of costs that are transferred to ready product in full.
General costs- those costs incurred by the enterprise during one stage of production.
General = Constants + Variables
opportunity cost
Accounting and economic costs
Accounting costs is the cost of the resources used by the firm at their actual acquisition prices.
Accounting costs = Explicit costs
economic costs- this is the cost of other goods (goods and services) that could be obtained with the most profitable of the possible alternative uses of these resources.
Opportunity (economic) costs = Explicit costs + Implicit costs
These two types of costs (accounting and economic) may or may not coincide with each other.
If resources are bought in a free competitive market, then the actual market price the equilibrium paid for their acquisition is the price of the best alternative (if this were not the case, the resource would go to another buyer).
If resource prices are not equal to equilibrium due to market imperfections or government intervention, then actual prices may not reflect the cost of the best of the rejected alternatives and may be higher or lower than the opportunity cost.
Explicit and implicit costs
From the division of costs into alternative and accounting costs, the classification of costs into explicit and implicit follows.
Explicit costs are determined by the amount of costs for paying for external resources, i.e. resources not owned by the firm. For example, raw materials, materials, fuel, labor, etc. Implicit costs are determined by the cost of internal resources, i.e. resources owned by the firm.
An example of an implicit cost for an entrepreneur would be the salary that he could receive while working for hire. For the owner of capital property (machinery, equipment, buildings, etc.), the previously incurred expenses for its acquisition cannot be attributed to the explicit costs of the current period. However, the owner bears implicit costs, since he could sell this property and deposit the proceeds in the bank at interest, or rent it to a third party and receive income.
Implicit costs, which are part of economic costs, should always be taken into account when making current decisions.
Explicit costs Opportunity costs take the form of cash payments to suppliers of factors of production and intermediate products.
Explicit costs include:
- workers' wages
- cash costs for the purchase and rental of machines, equipment, buildings, structures
- payment of transport costs
- communal payments
- payment of suppliers of material resources
- payment for services of banks, insurance companies
Implicit costs is the opportunity cost of using resources owned by the firm itself, i.e. unpaid expenses.
Implicit costs can be represented as:
- cash payments that could be received by the firm with a more profitable use of its assets
- for the owner of capital, implicit costs are the profit that he could receive by investing his capital not in this, but in some other business (enterprise)
Refundable and sunk costs
Sunk costs are considered in a broad and narrow sense.
In a broad sense, sunk costs include those costs that a firm cannot recover even if it ceases to operate (for example, the cost of registering and firms and obtaining a license, training advertising inscription or the name of the company on the wall of the building, the production of seals, etc.). Sunk costs are, as it were, a firm's payment for entering the market or leaving the market.
In the narrow sense of the word sunk costs are the costs of those types of resources that have no alternative use. For example, the cost of specialized equipment, custom-made by the company. Since the equipment has no alternative use, its opportunity cost is zero.
Sunk costs are not included in opportunity costs and do not affect the current decisions of the firm.
fixed costs
AT short term part of the resources remains unchanged, and part is changed to increase or decrease the total output.
In accordance with this, the economic costs of the short run are divided into fixed and variable costs. In the long run, this division loses its meaning, since all costs can change (i.e., they are variable).
fixed costs 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;
- management staff salary;
- rent;
- insurance payments;
variable costs
variable costs These are costs that depend on the volume of production of the firm. They represent the costs of the firm's variable factors of production.
Variable costs include:
- fare
- electricity costs
- raw material costs
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:
General (gross) costs
General (gross) costs are all costs for this moment the time required for a particular product.
Total cost (, total cost) is the total cost of the firm to pay for all factors of production.
Total costs depend on the volume of products produced, and are determined by:
- quantity;
- the market price of the resources used.
The relationship between the volume of output and the volume of total costs can be represented as a function of costs:
which is the inverse function of the production function.
Classification of total costs
The total costs are divided into:
total fixed costs(!!ТFC??, total fixed cost) is the firm's total costs for all fixed factors of production.
total variable costs(, total variabl cost) is the firm's total costs for variable factors of production.
In this way,
At zero output (when the firm is just starting production or has already ceased operations) TVC = 0, and, therefore, total costs coincide with total fixed costs.
Graphically, the ratio of total, fixed and variable costs can be depicted, just as it is shown in the figure.
Graphical representation of costs
The U-shape of the short-term ATC, AVC and MC curves is an economic pattern and reflects law of diminishing returns, according to which the additional use of a variable resource with a constant amount of a constant resource leads, starting from a certain point in time, to a reduction in marginal returns, or marginal product.
As has already been shown above, marginal product and marginal cost are in inverse relationship, and hence this law of diminishing marginal product can be interpreted as the law of increasing marginal cost. In other words, this means that starting from some point in time, additional use of a variable resource leads to an increase in marginal and average variable costs, as shown in Fig. 2.3.
Rice. 2.3. Average and marginal cost of production
The marginal cost curve MC always crosses the lines of average (ATC) and average variable (AVC) costs at their minimum points, just as average product curve AR always crosses the marginal product MP curve at its maximum point. Let's prove it.
Average total cost ATC=TC/Q.
marginal cost MS=dTC/dQ.
Take the derivative of the average total cost with respect to Q and get
In this way:
- if MC > ATC, then (ATC) "> 0, and the average total cost curve of ATC increases;
- if MS< AТС, то (АТС)" <0 , и кривая АТС убывает;
- if MC \u003d ATC, then (ATC)" \u003d 0, i.e. the function is at the extremum point, in this case at the minimum point.
Similarly, you can prove the ratio of average variables (AVC) and marginal (MC) costs on the graph.
Costs and price: four models of firm development
An analysis of the profitability of individual enterprises in the short term allows us to distinguish four models for the development of an individual firm, depending on the ratio of the market price and its average costs:
1. If the average total costs of the firm are equal to the market price, i.e.
ATS=R,
the firm earns a "normal" profit, or zero economic profit.
Graphically, this situation is shown in Fig. 2.4.
Rice. 2.4. Normal profit
2. If favorable market conditions and high demand increase the market price so that
ATC< P
then the firm gets positive economic profit, as shown in Figure 2.5.
Rice. 2.5. Positive economic profit
3. If the market price corresponds to the minimum average variable costs of the firm,
then the enterprise is located at the limit of expediency continuation of production. Graphically, a similar situation is shown in Figure 2.6.
Rice. 2.6. A firm in a marginal position
4. And finally, if the market conditions are such that the price does not cover even the minimum level of average variable costs,
AVC>P
it is advisable for the firm to close its production, since in this case the losses will be less than if the production activity continues (more on this in the topic "Perfect competition").
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 make effective management decisions that have a significant impact on profits. For the purposes of analysis in computer programs at enterprises, it is convenient to provide for automatic allocation of costs to fixed and variable based on primary documents, in accordance with the principle adopted in the organization. This information is very important for determining the "break-even point" of the business, as well as evaluating the profitability of various types of 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, consumables, energy resources involved in the main production, the salary of the main production personnel (together with accruals) and the cost of transportation 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, for example, gasoline, ethylene and fuel oil in one technological process, 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 a transport company it is direct, as it is directly proportional to the volume of transportation. The wages of 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.
The size of which depends on the intensity of production. Variable costs are the opposite fixed costs. The key feature by which variable costs are identified is their disappearance during the suspension of production.
What about variable costs?
Variable costs include the following:
- Piecework wages of workers tied to personal results.
- Expenses for the purchase of raw materials and components for production maintenance.
- Interest and bonuses paid to consultants and sales managers based on the results of the implementation of the plan.
- The amount of those taxes, the basis for the calculation of which are the volumes of production and sales. These are the following taxes: VAT, excises, according to the simplified tax system.
- Expenses for paying services to service organizations, for example, services for transporting goods or outsourcing sales.
- The cost of fuel and electricity consumed directly in the shops. A distinction is important here: the energy used in administrative buildings and offices is a fixed cost.
Break-even point and types of variable costs
The value of VC varies in proportion to the size of the total costs. When determining the break-even point, it is assumed that variable costs are proportional to the volume of production:
However, this is not always the case. An exception may be, for example, the introduction of a night shift. Since the night is higher, variable costs will increase at a faster rate than output. On this basis, there are three types of VC:
- Proportional.
- Regressive variables - costs increase at a slower rate than . This effect is known as the "scale effect".
- Progressive variables - the growth rate of costs is higher.
VC calculation
The classification of costs into fixed and variable is not used at all for accounting (there is no “variable costs” line in the balance sheet), but for management analysis. The calculation of variable costs is appropriate, because it gives the manager the opportunity to manage the profitability and profitability of the organization.
To determine the amount of variable costs, methods such as algebraic, statistical, graphical, regression-correlation and others are used. The most famous and widespread is the algebraic method, according to which the following formula can be used to determine the value of VC:
Algebraic analysis assumes that the research subject has such information as the volume of production in physical terms (X) and the size of the corresponding costs (Z), at least for two points of production.
Also often used margin method, based on the determination of the quantity marginal income, which is the difference between the profit of the organization and the total variable costs.
Breaking point: how to minimize variable costs?
A popular strategy for minimizing variable costs is to define " points fracture» - such a volume of production at which variable costs cease to increase proportionally and reduce the growth rate:
There may be several reasons for this effect. Among them:
- 1. Reducing the cost of wages for management personnel.
- 2. Application of a focusing strategy, which is to increase the specialization of production.
- 4. Integration of innovative developments into the production process.
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As you know, the cost is called expressed in monetary terms, the costs of the enterprise for the production of goods.
It is very important for any firm to have the most complete information about costs. This allows you to correctly set the price of manufactured products, calculate the level of efficiency of processes, learn about the efficiency of resource use by specific departments, etc.
Definition
In general, experts divide costs into fixed and variable e. Fixed costs do not depend on the level of output. They include the rent of premises, the cost of retraining staff, payment of utilities, etc.
The amount of variable costs depends on the volume of output. The main feature: when production is stopped, this type of spending disappears.
It should be noted that this division is very conditional. For example, there are also conditionally variable costs. Their value depends on the business activity of the company, but this dependence is not direct. These include, for example, long-distance calls as part of the subscription fee for telephone services.
Typically variable costs can be attributed to direct. This means that, firstly, they are directly related to the production of a product or service, and secondly, they can be included in the cost of goods based on primary documentation without any additional calculations.
You can learn more about these indicators from the following video:
Varieties
Without delving into the essence of the problem, one can decide that the growth of such costs grows with an increase in production volume, with an increase in sales of products, etc. However, this is not entirely true. Depending on the nature of the volume of output, among the variable costs are:
- proportional, which increase with an increase in the volume of production (if the production of goods increases by 20%, then spending increases proportionally by 20%);
- regression variables, whose growth rate is slightly behind the growth rate of production (if production increases by 20%, spending can increase by only 15%);
- progressive variables, which increase somewhat faster than the increase in production and sales of goods (if production increases by 20%, spending increases by 25%).
Thus, we see that the value of variable costs is not always directly proportional to the volume of production. For example, if in the case of expansion of the enterprise and an increase in the volume of output, a night shift is introduced, then the payment for it will be higher.
Direct and indirect costs among the variables are distinguished rather conditionally:
- Usually to direct refers to the costs that may be associated with the production of a particular product. They relate directly to the cost of goods. It can be spending on raw materials, fuel or wages for workers.
- To indirect general shop, general factory expenses, that is, those associated with the manufacture of a group of goods, can be attributed. Due to factors such as technological specificity or economic feasibility, they cannot be attributed directly to the cost. The most common example is the purchase of raw materials in complex industries.
In statistical documentation, expenses are divided into general and average. Such a division makes sense in the reporting documents of enterprises:
- Medium calculated by dividing variable costs by the volume of goods produced.
- General is the sum of fixed and variable costs of the organization.
You can also talk about production and non-production types. This division is directly related to the manufacturing process of products:
- Production included in the cost of goods. They are tangible and inventoryable.
- non-production However, they no longer depend on the volume of production, but on the duration. Therefore, it is impossible to inventory them.
Thus, we can single out the following most common examples of variable costs in production:
- wages of workers, depending on the volume of goods produced by them;
- the cost of raw materials and other materials necessary for the manufacture of products;
- expenses for warehousing, transportation and storage of goods;
- interest paid to sales managers;
- taxes related to production volumes: VAT, excises, etc.;
- services of other organizations related to maintenance of production;
- the cost of energy resources at enterprises.
How to count them?
For convenience, variable costs can be schematically expressed as follows:
- Variable costs = Raw materials + Materials + Fuel + Percentage of wages, etc.
For the convenience of calculating the dependence of costs on the volume of production, the German economist Mellerovich introduced cost response factor (K). The formula showing the relationship between cost change and productivity growth looks like this:
K = Y/X, where:
- K is the cost response factor;
- Y is the growth rate of costs (in percent);
- X - production growth rates (goods exchange, business activity), also calculated as a percentage.
- 110% / 110% = 1
The progressive spending response rate will be greater than one:
- 150% / 100% = 1,5
Therefore, the coefficient of regressive spending is less than 1, but greater than 0:
- 70% / 100% = 0,7
The cost of any unit of output can be expressed by the following formula:
Y= A + bX, where:
- Y denotes total costs (in any monetary unit, for example, rubles);
- A is the constant part (that is, the one that does not depend on production volumes);
- b - variable costs that are calculated per unit of product (expenditure response rate);
- X is an indicator of the business activity of the enterprise, presented in natural units.
AVC=VC/Q, where:
- AVC - average variable costs;
- VC - variable costs;
- Q is the volume of output.
On the graph, average variable costs are usually presented as an ascending curve.