CLASSIFICATION OF COSTS can be carried out taking into account mobility production factors. Based on this approach, fixed, variable and general (cumulative) costs are distinguished.
In the short term, some costs cannot be changed, so the company increases output by using fixed and variable production resources.
Fixed Costs (FC) Any cost in the short run that does not change with the level of production. For example, in late October and early November 2002, AvtoVAZ did not operate in Russia due to excess production of cars, but the plant continued to incur fixed costs, i.e. it was obliged to pay interest on loans, insurance premiums, property taxes, pay salaries for cleaners and caretakers, and make utility bills.
Despite the absence of a connection between production volumes and fixed costs, the influence of the latter on production does not stop, since they predetermine the technical and technological level of production.
Fixed costs include:
a) expenses for the maintenance of industrial buildings, machinery, equipment;
b) rent payments;
c) insurance premiums;
d) salaries to senior management personnel and future specialists of the enterprise.
All these expenses must be financed even when the enterprise does not produce anything.
The division of costs into fixed and variable is the starting point in the division of short-term and long-term periods. In the long run, all costs are variable because, for example, equipment may be replaced or a new plant may be acquired. The specified periods may not be the same for all industries. Thus, in light industry, it is possible to increase production capacity within a few days, while in heavy industry it may take several years.
Variable Costs (VC)- costs, the value of which varies depending on the change in the volume of output. If the product is not produced, then variable costs are equal to zero.
Variable costs include:
a) the cost of raw materials, materials, fuel, energy, transport services;
b) the cost of wages for workers and employees, etc.
In supermarkets, the payment for supervisory employees is a variable cost because managers can adjust the amount of these services to the number of customers.
Variable costs at the beginning of the growth of production volume increase for some time at a slowing pace, then they begin to increase at an increasing rate per each subsequent unit of output. Western economists explain this situation by the action of the so-called law of diminishing returns. Variable costs are manageable. An entrepreneur, in order to determine how much to produce, must know how much variable costs will increase with the planned increase in output.
Gross (general, total) costs (TC) the sum of fixed and variable costs incurred by the enterprise for the production of goods. In the short run, gross costs depend on the volume of output. Gross costs are determined by the formula:
Gross costs increase as output increases.
Costs per unit of goods produced are in the form of average fixed costs, average variable costs and average gross (total, total costs).
Average fixed costs (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 increase.
Average Variable Cost (AVC) is the total variable cost per unit of output. They are determined by dividing the variable costs by the corresponding quantity (volume) of output:
Average variable costs first fall, reaching their minimum, then begin to rise.
Average (total) costs (ATS)- this is total costs 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 of 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 costs marginal cost are always zero, i.e. MFC = 0. Therefore, marginal cost is always marginal variable cost, 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.
As already seen from the above, in the short run, the firm can change the volume of production by attaching variable resources to fixed capacities. For example, in a small bicycle manufacturing business with a constant amount of equipment, the owner can hire more workers to maintain it. To decide how many people to hire, he must know how the number of products produced will increase as the number of employees increases.
In the very general view the dynamics of the volume of production associated with an increasingly intensive use of fixed capacities, describes the so-called law of diminishing returns, or the law of diminishing marginal product. According to this law, the successive addition of additional units of a variable resource (for example, labor) to a fixed resource (for example, capital or land), starting from a certain moment, leads to a decrease in the additional, or marginal product, obtained per each additional unit of the variable resource. This means that if the number of workers operating a given production facility increases, then there will come a point when the growth in output will be slower and slower as each additional worker is recruited.
In order to better understand this law, it is worth giving an example with the same bicycle company. Suppose that only three workers were employed on it. As this number increases, additional specialization becomes possible, as a result, the loss of time during the transition from one operation to another decreases, and production capacities are used more fully. Thus, each additional worker makes an increasing contribution (gives an increasing additional, or marginal product) to the total output. However, at a certain stage, there will be too many employed; workspace, production equipment will be "overcrowded". Five people can serve the assembly line better than three, but if there are ten workers, they will start to interfere with each other. They will have to stand idle to use this or that equipment. As a result, each additional worker will contribute less and less to the total output compared to his predecessor. The example given refers to the manufacturing industry. But the same regularity is found, in particular, in agriculture, when fertilizers are taken as a variable resource, and the amount of cultivated land is taken as a fixed resource. With the introduction of more fertilizers, the yield will increase, but from a certain point, the increase for each additional ton applied will begin to decrease. Moreover, an overabundance of fertilizers is fraught with the complete death of the crop. The law of diminishing returns applies to all production processes and to all variable inputs when at least one factor of production remains unchanged.
The relationship between the amount of resources used and the volume of production achieved in physical terms is an important constraint on the firm's activity, the analysis of which, therefore, must play important role in management. However, most business decisions are made on the basis of not physical, but monetary indicators. Hence the need to combine production data obtained from the analysis of the law of diminishing returns with data on resource prices. This approach allows us to determine the dynamics of the total production costs of various volumes of production and costs per unit.
Based on what was said above about the short-term period, it is clear that within its limits it is also legitimate to divide costs into fixed and variable.
Constants are those whose value does not depend on changes in the volume of production. They are connected to existence itself. production equipment firm and its obligations. These are, as a rule, the costs of maintaining factory buildings, machinery and equipment, rent payments, insurance premiums, as well as the cost of paying salaries to management personnel and, possibly, the minimum number of employees.
Fixed costs are obviously mandatory and persist even if the firm does not produce anything at all. This means that the firm bears data and costs even with zero production. Variables are such costs, the value of which depends on changes in the volume of production (these are the costs of raw materials, auxiliary materials, components, fuel, electricity, transport services and most of the labor resources). To decide how much to produce, firm managers need to know how variable costs will rise as output increases. In the absence of production, the firm does not incur variable costs, any increase in production is associated with an increase in the amount of variable costs. However, up to a certain point, the firm's variable costs rise more slowly than the growth in output. They then increase at an accelerating rate for each additional unit of output produced. This behavior of variable costs is determined by the law of diminishing returns. An increase in marginal product up to a certain point will cause an ever smaller increase in variable resources for the production of each subsequent unit of output. Consequently, the sum of variable costs will increase at a slower rate than the volume of production. But since the fall ultimate performance an increasing amount of additional variable resources will be used to produce each additional unit of output. Accordingly, the sum of variable costs will increase at a rate exceeding the rate of growth in output.
For acceptance management decisions producers must know not only the total amount of costs, but also their value per unit of output, i.e. average cost level. This indicator is necessary, for example, for comparison with the price, which is always given per unit of production. There are three types of average costs: average fixed; average variables; average total cost.
Average variable costs first fall, reach a minimum, and then begin to rise. When returns are on the rise, fewer and fewer additional variable inputs are required to produce each additional unit of output. Therefore, per unit variable costs are reduced. At the stage of diminishing returns, the picture is opposite, and variable costs per unit of output increase.
Average total cost is the gross cost per unit of output. They can be calculated by dividing the gross cost by the amount of output produced.
Let us introduce the concept of marginal cost. For each additional unit of output, they can be determined by identifying the change in the amount of costs that resulted from the production of this unit. Because fixed costs do not change with shifts in a firm's output, marginal cost is determined by the change only in variable costs for each additional unit of output. Consequently, increasing returns to variable resources are expressed in a fall in marginal costs, and diminishing returns in their growth.
The definition of marginal cost is very important for the firm, because it allows you to determine those costs, the value of which it can always control. Marginal cost shows the amount of those costs that the firm will incur if it increases production by the last unit of output, or the money that it saves if it reduces production by that unit.
Concluding the analysis of production costs in the short run, we should also consider some important relationships between various types average and marginal cost. The marginal cost curve intersects the average variable cost curve and the average total cost curve at their minimums. This is not a simple coincidence, but a reflection of the relationship, which in the language of mathematics is called the "rule of limit and average." If the incremental cost of producing each successive unit of output is less than the average cost of the units already produced, then the production of that next unit will lower the total average cost. If the cost of this next unit is higher than the average, then it is obvious that its production will lower the level of average total costs.
The analysis of marginal and average costs is an important means of developing rational management decisions. Any change in prices and volumes of supply that does not entail a change in the size of production capacity will be carried out taking into account the dynamics of the cost curves of this firm in the short run.
The short-term period is a period of time too short for a change in production capacity, but sufficient for a change in the intensity of use of these capacities. Production capacity remains unchanged in the short run, and output can be changed by changing the quantity work force, raw materials, and other resources used at these facilities. The cost of production of any product depends not only on the prices of resources, but also on technology - on the amount of resources that is needed for production. We'll look at how output will change as more and more variable inputs are introduced.
Production costs in the short run are divided into fixed, variable, general, average and marginal. Fixed costs (FC) - costs that do not depend on the volume of production. They will always take place, even if the firm does not produce anything. These include: rent, deductions for depreciation of buildings and equipment, insurance premiums, capital repairs, payment of obligations on bonded loans, as well as salaries of senior management personnel, etc. Fixed costs remain unchanged at all levels of production, including zero. Graphically, they can be represented as a straight line parallel to the x-axis (see Fig. 1). It is denoted by the line FC. Variable cost (VC) - costs that depend on the volume of production. These include the cost of wages, raw materials, fuel, electricity, transportation services, and similar resources. Unlike fixed costs, variable costs vary in direct proportion to the volume of production.
Graphically, they are depicted as an ascending curve (see Fig. 1), denoted by the line VC. The variable cost curve shows that as output increases, the variable costs of production increase. The distinction between fixed and variable costs is essential for every businessman. An entrepreneur can manage variable costs, as their value changes over a short period as a result of changes in the volume of production. Fixed costs are beyond the control of the company's administration, since they are mandatory and must be paid regardless of the volume of production.
Rice. one.
General, or gross, costs (total cost, TC) - costs in general for a given volume of production. They are equal to the sum of fixed and variable costs: TC = FC + VC. If we impose on each other the curves of fixed and variable costs, we get a new curve that reflects the total costs (see Fig. 1). It is denoted by the TS line. Average total (average total cost, ATC, sometimes called AC) is the cost per unit of production, i.e., total costs (TC) divided by the number of products produced (Q): ATC \u003d TC / Q. Average total costs are usually used to compare with the price, which is always quoted per unit. Such a comparison makes it possible to determine the amount of profit, which allows you to determine the tactics and strategy of the company in the near future and in the future. Graphically, the curve of average total (gross) costs is depicted by the ATC curve (see Fig. 2). The average cost curve is U-shaped. This suggests that average costs may or may not be equal to the market price. A firm is profitable or profitable if market price above average costs.
Rice. 2.
AT economic analysis In addition to average total costs, concepts such as average fixed and average variable costs are used. This is similar to the average total cost, fixed and variable costs per unit of output. They are calculated as follows: average fixed costs (AFC) are equal to the ratio of fixed costs (FC) to output (Q): AFC = FC / Q. Average variables (AVC), by analogy, are equal to the ratio of variable costs (VC) to output (CO):
Average total costs - the sum of average fixed and variable costs, i.e.:
ATC = AFC + AVC, or ATC = (FC + VC) / Q.
The value of average fixed costs continuously decreases as the volume of production increases, since the fixed amount of costs is distributed over more and more units of production. Average variable costs change in accordance with the law of diminishing returns. Marginal cost is important for determining the firm's strategy in economic analysis. Marginal, or marginal, costs (marginal cost, MC) - the costs associated with the production of an additional unit of output. MC can be determined for each additional unit of output by dividing the change in the increase in the sum of total costs by the amount of increase in output, i.e.:
MS = DTS/DQ.
Marginal cost (MC) is equal to the increase in variable costs (VVC) (raw materials, labor), if it is assumed that fixed costs (FC) are unchanged. Therefore, marginal cost is a function of variable cost. In this case:
MS = DVC / DQ.
Thus, marginal cost (sometimes referred to as incremental cost) is the increase in cost resulting from the production of one additional unit of output. Marginal cost measures how much it will cost a firm to increase its output by one unit. Graphically, the marginal cost curve is an ascending line MC, intersecting at point B with the curve of average total costs ATC and at point C with the curve of average variable costs AVC (see Fig. 3). Comparison of Average Variables and Marginal Costs of Production - important information to manage the firm, determine the optimal size of production, within which the firm consistently receives income.
Rice. 3.
From fig. 3 shows that the curve of marginal costs (MC) depends on the value of the average variable costs (AVC) and gross average costs (ATC). At the same time, it does not depend on average fixed costs (AFC), because fixed costs FC exist regardless of whether additional products or not. Variable and gross costs rise with output. The rate at which these costs increase depends on the nature of the production process and, in particular, on the extent to which production is subject to the law of diminishing returns with respect to variable factors. If labor is the only variable, what happens when output increases? To produce more, the firm must hire more workers. Then, if the marginal product of labor decreases rapidly as labor costs increase (due to the law of diminishing returns), more and more costs are needed to accelerate output. As a result, variable and gross costs rise rapidly along with an increase in output. On the other hand, if the marginal product of labor falls slightly as more labor is used, costs will rise less rapidly as output increases. Marginal and average costs are important concepts. As we shall see in the next chapter, they have a decisive influence on the firm's choice of output. Knowledge of short-term costs is especially important for firms operating in conditions of marked fluctuations in demand. If a firm is currently producing at a rate at which marginal cost rises sharply, uncertainty about future increases in demand may force the firm to change its manufacturing process and likely to induce additional costs today to avoid higher costs tomorrow.
The short run is a period of time that is too short for an enterprise to change its production capacity, but long enough for a change in the intensity of use of these fixed capacities. In the short term, the firm is able to change the volume of production, involving in this process additional quantities of changeable resources (the use of more or less amount of living labor, raw materials and other resources), while the production capacity remains unchanged (fixed). But how does output change as more and more variable resources are added to the firm's fixed resources?
In the general form The answer to this question is given by the law of diminishing returns, also called the law of diminishing marginal product, or the law of varying proportions. This law states that when a variable resource (for example, labor) is sequentially added to a company's fixed (fixed) resource (for example, capital or land), the additional, or marginal, product per each subsequent unit of the variable resource decreases starting from a certain moment.
Rice. one. Figures 6a and 1.6b illustrate the law of diminishing returns and help you understand more deeply the relationship between total, marginal, and average products.
As an additional variable resource (labor) is added to a constant amount of other resources (land or capital), the resulting total product first increases at a decreasing rate, then reaches its maximum and begins to decrease (Fig. 1.6a).
Marginal product (Fig. 1.6b) reflects the changes in total product associated with the investment of each additional unit of labor. Marginal product measures the change in total product associated with the addition of each new worker. Therefore, the three phases through which the total product passes also affect the dynamics of the marginal product. When total product grows at an accelerated rate, marginal product inevitably increases. At this stage, additional workers contribute more and more to the total output. Similarly, when total product is growing but at a slower rate, marginal product is positive but shrinking. Each worker contributes less to the total output than his predecessor. When total product reaches its maximum, marginal product becomes zero. When total product begins to decline, marginal product becomes negative.
Figure 1.6 Total, marginal and average product curves
The dynamics of the average product reflects the same general "growth - maximum - decrease" relationship between variable inputs of labor and the volume of production that is characteristic of marginal product. However, attention should be paid to the ratio of marginal and average products: where the marginal product exceeds the average, the latter increases; and wherever the marginal product is less than the average, the latter decreases. It follows that the marginal product curve intersects the average product curve at the point where the latter reaches its maximum.
Fixed, variable and total costs
We already know that over a short period of time, some resources related to the production capacity of the firm remain unchanged. Other resources are modifiable. It follows that within the short run costs can be divided into fixed and variable.
In column (2) of Table. 1.1 the firm's fixed costs are conditionally taken as $100. By definition, fixed costs exist at any level of production, including zero. In the short term, fixed costs cannot be avoided.
In column (3) of Table. 1.1 we find that the total amount of variable costs varies in direct proportion to the volume of production. However, the increase in the amount of variable costs associated with an increase in output per unit of output is not constant. Variable costs rise at the start of a ramp-up, but their rate of growth slows down over time. This continues until the fourth unit of output, but then variable costs begin to increase at an increasing rate per each subsequent unit of output.
This behavior of variable costs is due to the law of diminishing returns. Due to the increase in marginal product, for the production of each subsequent unit of output, for some time, smaller and smaller increments of variable resources will be required. And since all units of variable resources have the same price, the total amount of variable costs will increase at a decreasing rate. But as marginal product begins to decline in accordance with the law of diminishing returns, the production of each successive unit of output will require more and more additional variable resources. The sum of variable costs, therefore, will increase at an increasing rate.
Total costs are the sum of fixed and variable costs at any level of production. In table. 1.1 they are shown in column (4). At zero output, total costs equal the firm's fixed costs.
Variable costs are costs that the entrepreneur is able to manage, that is, change their value over a short period of time by changing the volume of production. Fixed costs, in contrast, are not subject to ongoing control by the firm's management; such costs are unavoidable in the short run and must be paid regardless of the volume of production.
Specific, or average, costs
Producers, of course, care about their total costs, but they also care about unit, or average, costs. In particular, it is the indicators of average costs that are more appropriate to use for comparison with the price of the product, which is always set per unit of output. Average fixed, average variable and average total costs are shown in columns (5), (6) and (7) of Table. 1. Let's see how the values of unit costs are calculated and how they change depending on the change in the volume of production.
1. Average fixed costs (AFC) of any volume of production are determined by dividing the total fixed costs by the corresponding quantity of goods produced:
Since total fixed costs are, by definition, independent of the volume of output produced, average fixed costs decrease as production increases. As output increases, total fixed costs of, say, $100 are spread over more and more units of output. On fig. 1.7 curve of average fixed costs continuously decreases as the volume of production increases.
2. The average variable costs (AVC) of any volume of production are determined by dividing the total variable costs by the corresponding amount of output:
Average variable costs initially decrease until they reach their minimum, and then begin to rise. Graphically, this is manifested in the concave arcuate shape of the curve of average variable costs, which is shown in Fig. 1.7.
Since total variable costs are subject to the law of diminishing returns, this should also be reflected in the values of average variable costs, which are calculated on their basis. In the increasing returns stage, each of the first four units of output requires fewer and fewer additional variable resources to produce. As a result, variable costs per unit of product are reduced. At the production of the fifth unit, average variable costs reach their minimum value and after that begin to increase, since diminishing returns give rise to the need for an increasing amount of variable resources for the production of each additional unit of product.
The convex average product curve is an inverted concave arcuate average variable cost curve.
3. The average total cost (ATC) of any volume of production is calculated by dividing the total cost by the corresponding amount of output or by adding the average fixed and average variable costs of a particular volume of production:
ATC= TC/Q= AFC+AVC (1.7)
The values of this indicator are given in column (7) of Table. 1.1. Graphically, the average total costs are established as a result of vertical addition of the curves of average fixed and average variable costs, as shown in fig. 1.7. Thus, the segment between the curves of average total and average variable costs indicates the value of average fixed costs for any volume of production.
marginal cost
From column (4) of Table. 1.1 shows that as a result of the production of the first unit of product, total costs increase from 100 to 190 dollars. Therefore, the incremental, or marginal, cost of producing this first unit is $90. (column 8), etc.
Marginal cost can also be calculated from total variable costs (column 3), since total and total variable costs differ only by a fixed amount of fixed costs ($100). Therefore, the change in total costs is always equal to the change in total variable costs for each additional unit of product.
Marginal cost is inherently more than any other cost directly and directly controllable. Decisions about output are usually based on marginal measures, that is, decisions about whether the firm produces one more unit or one less product. Combined with indicator marginal income The marginal cost indicator allows the firm to determine the profitability of a change in the scale of production. On fig. 1.8 the curve of marginal costs is shown. It descends steeply, reaches its minimum and then rises quite steeply. This reflects the fact that variable costs, and hence total costs, first rise at a decreasing and then at an increasing rate.
The marginal cost curve (MC) intersects the curves of average total (ATC) and average variable costs (AVC) at the points of the minimum value of each of them. This is explained by the fact that while the additional, or marginal, value attached to the total (or variable) costs remains less than the average value of these costs, the average value of the costs necessarily decreases. Conversely, when the marginal value joins the total (or variable) costs and exceeds their average value, then the average value of the costs should increase.
The relationship between marginal product and marginal cost is easy to understand from Figure 1.9.
The marginal cost (MC) and average variable cost (AVC) curves are mirror images of the marginal product (MP) and average product (AR) curves, respectively. If we assume that labor is the only element of variable costs, and the price of labor (rate wages) remains constant, marginal cost can be calculated by dividing the wage rate by the marginal product. Therefore, when marginal product rises, marginal cost falls; when marginal product is at its maximum, marginal cost is at its minimum; and when marginal product decreases, marginal cost rises. A similar relationship links the average product and average variable costs.
In the process of producing goods and services, living and past labor is expended. At the same time, each company seeks to obtain the highest possible profit from its activities. To do this, each company has two ways: to try to sell its product at the highest possible price, or to try to reduce its production costs, i.e. production costs.
Depending on the time spent on changing the amount of resources used in production, there are short-term and long-term periods in the activities of the firm.
Short-term is the time interval during which it is impossible to resize manufacturing enterprise, owned by the company, i.e. amount fixed costs carried out by this company. Over a short time period, changes in output can result solely from changes in variable costs. It can influence the course and effectiveness of production only by changing the intensity of the use of its capacities.
During this period, the company can quickly change its variable factors - the amount of labor, raw materials, auxiliary materials, fuel.
In the short run, the quantity of some production factors remains unchanged, while the quantity of others changes. Costs in this period are divided into fixed and variable.
This is due to the fact that the provision of fixed costs is determined by fixed costs.
fixed costs. Fixed costs got their name because of their nature of immutability and independence from changes in the volume of production.
However, they are classified as current costs, because their burden is on the firm daily if it continues to rent or own the production facilities it needs to continue. production activities. When these current costs take the form of periodic payments, they are explicit monetary fixed costs. If they reflect opportunity cost associated with the ownership of certain production facilities acquired by the firm, they are implicit costs. On the graph, fixed costs are depicted by a horizontal line parallel to the x-axis (Fig. 1).
Rice. 1. Fixed costs
Fixed costs include: 1) labor costs management personnel; 2) rent payments; 3) insurance premiums; 4) deductions for depreciation of buildings and equipment.
variable costs
In addition to fixed costs, firms also incur variable costs (Fig. 2.). variable costs can quickly change within an enterprise of a given size as output changes. raw materials, energy, hourly payment labor are examples of the variable costs of most firms. It depends on the specific situation which costs are fixed and which are variable.
Fig 2. Variable costs