What are the firm's fixed costs. Fixed costs of production

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 an economic term, includes both the amount of money actually spent and the lost profit. 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 in the economic theory of 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 costs 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 announce an open tender, 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 the finished product in parts (the cost of the 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 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).

The capital that transfers its value to the finished product during one turnover, spent on the purchase of raw materials and materials for each production cycle, is called working capital. 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 book 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 the cost of equipment of 100,000 rubles will be calculated as 100,000x6/21, depreciation deductions for the third year will be 100,000x4/21, 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, allowing more frequent replacement of equipment in enterprises. In addition, accelerated depreciation can be carried out as part of state support for small businesses (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 supplies, piecework wages of 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 output.

The sum of fixed 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.

Average fixed costs are determined by dividing the fixed costs by the amount of output 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 requires 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 diminishing marginal productivity of factors of production. 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 cost. 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 must be supplemented by the study of marginal costs.

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 of marginal income or marginal revenue is used.

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 it remains possible for him 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.

Any firm functions for the sake of generating income, and its work is impossible without the funds spent. There are various types of such expenses. There are activities for which constant investments of finance are required. But some of the costs are not regular, and their impact on the course of the product and its sale must also be taken into account.

So, the main meaning of the work of any company is to release a product and receive income from it. In order to start this activity, one must first acquire raw materials, tools of production, and hire labor. Certain finances are spent on this, in economics they are called costs.

People invest finance in production activities for a variety of purposes. Accordingly, the classification of expenses was adopted. Categories of costs (depending on properties):

• Explicit. Such costs are made directly, for the payment of wages to employees, commissions to other organizations, payment for the activities of banks and transport.
• Implicit. Costs for the needs of company executives that are not specified in the contracts.
• Permanent. The means by which continuous production processes are provided.
• Variables. Costs that can easily be adjusted while maintaining the same level of output.
• Irrevocable. Expenses of movable assets that are invested in the activities of the company free of charge. They are characteristic of the initial period of production or re-profiling of the organization. These funds can no longer be spent on other organizations.
• Medium. Costs obtained in the course of calculations, characterizing investments in each unit of the product. This indicator contributes to the pricing of goods.
• Limit. This is the largest cost that cannot be increased due to the low efficiency of capital investments in the company.
• Appeals. The cost of delivering goods from the producer to the consumer.

Application of fixed and variable costs

Consider the differences between fixed costs and variables, their economic characteristics.

The first type of costs (fixed) is designed for investments in the manufacture of a product in a single production cycle. In each organization, their size is individual, so the enterprise considers them separately, taking into account the analysis of the release process. Note that such costs will not differ from the initial production stage to the sale of products to the consumer.

The second type of costs (variables) changes in each production cycle, practically without repetition of this indicator.

The two types of costs together make up the total costs, which are calculated at the end of the production process.

Simply put, Fixed costs are those that do not change over time. What can be attributed to them?

1. payment of utility services;
2. The cost of operating the premises;
3. payment of rent;
4. The salary of the staff;

It must be taken into account that the constant level of total costs used in a specific time period of production, during one cycle, refers only to the total number of units of goods produced. If we calculate such costs for each unit, their size will decrease in accordance with the growth in output. This fact applies to all types of production.

Variable costs are proportional to the variable quantity or volume of the product produced.. These include:

1. Energy costs;
2. Material costs;
3. Contractual wages.

This type of cost is closely related to the volume of output of the product, as a result of which it changes according to the indicators of the production of this product.

Cost examples:

Each production cycle corresponds to a specific amount of costs that remain unchanged under any conditions. There are other costs that depend on production resources. As previously stated, costs over a short period of time are variable and fixed.

For a long time, such characteristics are not suitable, because. costs will change in this case.

Fixed Cost Examples

Fixed costs remain at the same level for any volume of output of the product, in a small time period. This is the cost of stable factors of the company, not proportional to the number of units of goods. Examples of such expenses are:

• payment of interest on a bank loan;
• depreciation expenses;
• payment of interest on bonds;
• salary for managers at the enterprise;
• insurance costs.

All costs, independent of the production of a product, which are unchanged in a short period of the production cycle, can be called constant.

Variable Cost Examples

Variable costs, on the other hand, are essentially investments in the production of goods, and therefore depend on its volume. The amount of investment is directly proportional to the amount of goods produced. Examples would be spending on:

• on stocks of raw materials;
• payment of bonuses to employees producing products;
• delivery of materials and the product itself;
• energetic resources;
• equipment;
• other expenses for the production of goods or the provision of services.

Consider a graph of variable costs, which is a curve. (Figure 1.)

Fig.1 - variable cost schedule

The path of this line from the origin to point A depicts an increase in costs with an increase in the quantity of goods produced. Section AB: more rapid increase in costs in terms of mass production. Variable costs can be affected by disproportionate costs for transport services or consumables, improper use of a released product with reduced demand for it.

Example of calculating production costs:

Consider the calculation of fixed and variable costs on a specific example. Let's say a shoe company produces 2,000 pairs of boots in a year. During this time, the factory spends funds on the following needs:

• rent - 25,000 rubles;
• interest on a bank loan - 11,000 rubles;
• payment for the production of one pair of shoes - 20 rubles;
• raw materials for the production of a pair of boots - 12 p.

Our task: to calculate the variable, fixed costs, as well as the funds spent on each pair of shoes.

In this case, only rent and loan payments can be called fixed costs. Such costs are unchanged, depending on production volumes, so it is easy to calculate them: 25,000 + 11,000 = 36,000 rubles.

The cost of producing one pair of shoes is variable costs: 20+12=32 rubles.

Consequently, the annual variable costs are calculated as follows: 2000*32=64000 rubles.

General costs- this is the sum of variables and constants: 36,000 + 64,000 \u003d 100,000 rubles.

Average total cost per pair of shoes: 100,000/20=50

Production cost planning

It is important for every company to correctly calculate, plan and analyze production costs.

In the process of cost analysis, options are considered for the economical use of finance that is invested in production and should be distributed correctly. This leads to a decrease in the cost, and hence the final price of the manufactured goods, as well as an increase in the competitiveness of the company and an increase in its income.

The task of each company is to save as much as possible on production and optimize this process so that the enterprise develops and becomes more successful. As a result of these measures, the profitability of the organization also increases, which means that there are more opportunities to invest in it.

To plan production costs, you need to take into account their size in previous cycles. In accordance with the volume of goods produced, a decision is made to reduce or increase production costs.

Balance sheet and costs

Among the accounting documentation of each company there is a "Profit and Loss Statement". This is where all your expenses are recorded.

A little more about this document. This report does not characterize the property status of the enterprise in general, but provides information about its activities for the selected time period. In accordance with OKUD, the profit and loss statement has a form 2. Income and expenses are recorded in it incrementally from the beginning to the end of the year. The report includes a table, in line 020 of which the main costs of the organization are displayed, in line 029 - the difference between profit and costs, in line 040 - expenses included in account 26. The latter are travel expenses, payment for the protection of premises and labor, employee remuneration. Line 070 shows the company's interest on credit obligations.

The initial results of the calculations (when compiling the report) are divided into direct and indirect costs. If we consider these indicators separately, then direct costs can be considered fixed costs, and indirect costs - variables.

In the balance sheet, cost data is not recorded directly, it shows only the assets and financial liabilities of the enterprise.

Accounting costs (otherwise called explicit)- is a payment in cash equivalent of any transactions. They are closely related to the economic costs and income of the firm. We subtract the explicit costs from the company's profit, and if we get zero, then the organization has used its resources in the most correct way.

Cost Calculation Example

Consider an example of calculating accounting and economic costs and profits. The owner of the recently opened laundry planned to receive an income of 120,000 rubles a year. To do this, he will have to cover the costs:

• rent of premises - 30,000 rubles;
• salary for administrators - 20,000 rubles;
• purchase of equipment - 60,000 rubles;
• other small expenses - 15,000 rubles;

Credit payments - 30%, deposit - 25%.

The head of the enterprise bought the equipment at his own expense. Washing machines break down after a while. Given this, it is necessary to create a depreciation fund, into which 6,000 rubles will be transferred every year. All of the above are explicit costs. Economic costs - the possible profit of the owner of the laundry, in case of acquiring a deposit. To pay the initial expenses, he will have to use a bank loan. Loan in the amount of 45,000 rubles. will cost him 13,500 rubles.

Thus, we calculate explicit costs: 30 + 2 * 20 + 6 + 15 + 13.5 = 104.5 thousand rubles. Implicit (deposit interest): 60 * 0.25 = 15 thousand rubles.

Accounting income: 120-104.5 \u003d 15.5 thousand rubles.

Economic income: 15.5-15=0.5 thousand rubles.

Accounting and economic costs differ from each other, but they are usually considered together.

The value of production costs

Production costs form the law of economic demand: with an increase in the price of a product, the level of its market supply increases, and with a decrease, the supply decreases, while maintaining other conditions. The essence of the law is that each manufacturer wants to offer the maximum amount of goods at the highest price, which is the most profitable.

For the buyer, the cost of the goods is a deterrent. The high price of a product forces the consumer to buy less of it; and, accordingly, cheaper products are purchased in large volumes. The manufacturer receives a profit for the product released, so he seeks to produce it in order to acquire revenue from each unit of the product, in the form of its price.

What is the main role of production costs? Consider it on the example of a manufacturing industrial enterprise. In a certain period of time, production costs increase. To compensate for them, you need to raise the price of the product. The increase in costs is due to the fact that it is impossible to quickly expand the production area. The equipment is overloaded, which reduces the efficiency of the enterprise. Thus, in order to produce a product with the highest cost, the firm must charge a higher price for it. Price and supply level are directly related.

To determine the total cost of producing different volumes of output and the cost per unit of output, it is necessary to combine production data included in the law of diminishing returns with information on resource prices. As already noted, over a short period of time, some resources associated with the technical equipment of the enterprise remain unchanged. The number of other resources may vary. It follows that in the short term, various types of costs can be classified as either fixed or variable.

fixed costs. Fixed costs are those costs that do not change with changes in the volume of production. Fixed costs are associated with the very existence of the company's production equipment and must be paid even if the company does not produce anything. Fixed costs typically include bond payments, bank loans, rent payments, enterprise security, utility bills (telephone, lighting, sewerage), as well as time wages for employees of the enterprise.

variable costs. Variables are called such costs, the value of which varies depending on changes in the volume of production. These include the cost of raw materials, fuel, energy, transportation services, most of the labor force, and so on. The amount of variable costs varies depending on the volume of production.

General costs is the sum of fixed and variable costs for any given volume of production.

General, fixed and variable costs will be shown on the graph (see Fig. 1).

At zero output, the total cost is equal to the firm's fixed costs. Then, for the production of each additional unit of output (from 1 to 10), the total cost changes by the same amount as the sum of variable costs.

The sum of variable costs varies from the origin, and the sum of fixed costs is added to the vertical dimension of the sum of variable costs each time to obtain a total cost curve.

The distinction between fixed and variable costs is significant. Variable costs are costs that can be managed quickly, their value can be changed over a short period of time by changing the volume of production. On the other hand, fixed costs are obviously out of the control of the firm's management. Such costs are mandatory and must be paid regardless of the volume of production.

The implementation of any activity of companies is impossible without investing costs in the process of making a profit.

However, there are different types of costs. Some operations during the operation of the enterprise require constant investments.

But there are also costs that are not fixed costs, i.e. are related to variables. How do they affect the production and sale of finished products?

The concept of fixed and variable costs and their differences

The main purpose of the enterprise is the manufacture and sale of manufactured products for profit.

To produce products or provide services, you must first purchase materials, tools, machines, hire people, etc. This requires the investment of various amounts of money, which are called "costs" in economics.

Since monetary investments in production processes are of various types, they are classified depending on the purpose of using the costs.

In economics costs are shared by these properties:

1. Explicit - this is a type of direct cash costs for making payments, commission payments to trading companies, payment for banking services, transportation costs, etc.;
2. Implicit, which include the cost of using the resources of the owners of the organization, not provided for by contractual obligations for explicit payment.
3. Permanent - this is an investment in order to ensure stable costs in the production process.
4. Variables are special costs that can be easily adjusted without affecting operations, depending on changes in output.
5. Irrevocable - a special option for spending movable assets invested in production without return. These types of expenses are at the beginning of the release of new products or the reorientation of the enterprise. Once spent, the funds can no longer be used to invest in other business processes.
6. Average costs are estimated costs that determine the amount of capital investment per unit of output. Based on this value, the unit price of the product is formed.
7. Marginal - this is the maximum amount of costs that cannot be increased due to the inefficiency of further investments in production.
8. Returns - the cost of delivering products to the buyer.

From this list of costs, fixed and variable types are important. Let's take a closer look at what they consist of.

Kinds

What should be attributed to fixed and variable costs? There are some principles on which they differ from each other.

In economics characterize them as follows:

• fixed costs include the costs that must be invested in the manufacture of products within one production cycle. For each enterprise, they are individual, therefore, they are taken into account by the organization independently on the basis of an analysis of production processes. It should be noted that these costs will be typical and the same in each of the cycles during the manufacture of goods from the beginning to the sale of products.
• variable costs that can change in each production cycle and are almost never repeated.

Fixed and variable costs add up to total costs, summed up after the end of one production cycle.

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What applies to them

The main characteristic of fixed costs is that they do not actually change over a period of time.

In this case, for an enterprise that decides to increase or decrease the volume of output, such costs will remain unchanged.

Among them can be attributed such costs:

• communal payments;
• building maintenance costs;
• rent;
• employee earnings, etc.

In this scenario, it must always be understood that the constant amount of total costs invested in a certain period of time for the release of products in one cycle will only be for the entire number of manufactured products. When such costs are calculated piece by piece, their value will decrease in direct proportion to the growth in production volumes. For all types of industries, this pattern is an established fact.

Variable costs depend on changes in the quantity or volume of products produced.

To them refer such expenses:

• energy costs;
• raw materials;
• piecework wages.

These cash investments are directly related to production volumes, and therefore vary depending on the planned parameters of output.

Examples

In each production cycle there are cost amounts that do not change under any circumstances. But there are also costs that depend on production factors. Depending on such characteristics, economic costs for a certain, short period of time are called fixed or variable.

For long-term planning, such characteristics are not relevant, because Sooner or later, all costs tend to change.

Fixed costs - ϶ᴛᴏ costs that do not depend in the short run on how much the company produces. It is worth noting that they represent the costs of its constant factors of production, independent of the quantity of goods produced.

Depending on the type of production into fixed costs The following expenses are included:

Any costs that are not related to the release of products and are the same in the short period of the production cycle can be included in fixed costs. According to this definition, it can be stated that variable costs are such costs that are invested directly in output. Their value always depends on the volume of products or services produced.

Direct investment of assets depends on the planned amount of production.

Based on this characteristic, to variable costs include the following costs:

• raw material reserves;
• payment of remuneration for the work of workers engaged in the manufacture of products;
• delivery of raw materials and products;
• energy resources;
• tools and materials;
• other direct costs of producing products or providing services.

The graphical representation of variable costs displays a wavy line that smoothly rushes up. At the same time, with an increase in production volumes, it first rises in proportion to the increase in the number of manufactured products, until it reaches point "A".

Then there is cost savings in mass production, in connection with which the line no longer rushes up at a slower speed (section "A-B"). After the violation of the optimal expenditure of funds in variable costs after the point "B", the line again takes a more vertical position.
The growth of variable costs can be influenced by the irrational use of funds for transportation needs or excessive accumulation of raw materials, volumes of finished products during a decrease in consumer demand.

Calculation procedure

Let's give an example of calculating fixed and variable costs. Production is engaged in the manufacture of shoes. The annual output is 2000 pairs of boots.

The enterprise has the following types of expenses per calendar year:

1. Payment for renting the premises in the amount of 25,000 rubles.
2. Payment of interest 11,000 rubles. for a loan.

Production costs goods:

• for wages when issuing 1 pair of 20 rubles.
• for raw materials and materials 12 rubles.

It is necessary to determine the size of the total, fixed and variable costs, as well as how much money is spent on the manufacture of 1 pair of shoes.

As you can see from the example, only rent and interest on a loan can be added to fixed or fixed costs.

Due to the fact that fixed costs do not change their value with a change in production volumes, then they will amount to the following amount:

25000+11000=36000 rubles.

The cost of making 1 pair of shoes is a variable cost. For 1 pair of shoes total costs amount to the following:

20+12= 32 rubles.

For the year with the release of 2000 pairs variable costs in total are:

32x2000=64000 rubles.

General costs calculated as the sum of fixed and variable costs:

36000+64000=100000 rubles.

Let's define average total cost, which the company spends on tailoring one pair of boots:

100000/2000=50 rubles.

Cost analysis and planning

Each enterprise must calculate, analyze and plan the costs of production activities.

Analyzing the amount of expenses, options for saving funds invested in production with a view to their rational use are considered. This allows the company to reduce its output and, accordingly, set a cheaper price for finished products. Such actions, in turn, allow the company to successfully compete in the market and ensure continuous growth.

Any enterprise should strive to save production costs and optimize all processes. The success of the development of the enterprise depends on this. Due to the reduction of costs, the company significantly increases, which makes it possible to successfully invest in the development of production.

Costs planned taking into account the calculations of previous periods. Depending on the volume of output, they plan to increase or decrease the variable costs of manufacturing products.

Display in the balance sheet

In the financial statements, all information about the costs of the enterprise is entered in (form No. 2).

Preliminary calculations during the preparation of indicators for entering in can be divided into direct and indirect costs. If these values ​​are shown separately, then we can assume such reasoning that indirect costs will be indicators of fixed costs, and direct costs, respectively, are variables.

It is worth considering that there is no data on costs in the balance sheet, since it reflects only assets and liabilities, and not expenses and incomes.

For information on what fixed and variable costs are and what applies to them, see the following video material:

Almost every person dreams of quitting his "uncle's job" and starting his own business, which will bring pleasure and a stable income. However, in order to become an aspiring entrepreneur, you will need to create a business plan containing a financial model of the future enterprise. Only this approach to business development will allow you to find out whether the investment in starting your own business can pay off. In this article, we propose to learn about what fixed and variable costs are and how they affect the profit of an enterprise.

Variable and fixed costs are the two main types of costs.

The importance of drawing up a financial model

Have you ever wondered why you need to write a business plan containing a financial model before starting your own business. Creating a business plan allows a novice entrepreneur to obtain information about the expected revenue of the enterprise, as well as determine fixed and variable costs. All these measures are aimed at choosing a strategy for developing the financial policy of the future business.

The commercial component is one of the basic foundations of a successful enterprise. Economic theory says that finance is a blessing, which should bring a new blessing. It is this theory that should be guided in the early stages of entrepreneurial activity. At the heart of every enterprise is the rule that profit is the value of paramount importance. Otherwise, your entire business model will turn into patronage.

After we have taken as a rule the theory that working at a loss is unacceptable, we should move on to the financial model itself. The profit of the enterprise is the difference between income and production costs. The latter are divided into two groups: variable and fixed costs of the organization. In a situation where the level of expenses exceeds current income, the company is considered unprofitable.

The main task of entrepreneurial activity is to extract the maximum benefit, subject to the minimum use of financial resources.

Based on this, we can conclude that in order to increase income, it is necessary to sell as many finished products as possible. However, there is another method of profit, which is to reduce production costs. It is quite difficult to understand this scheme, since the cost optimization process has many different nuances. It is important to mention that such economic terms as "cost level", "cost item" and "production cost" are synonymous. Let's look at all types of existing production costs.

Varieties of expenses

All expenses of the organization are divided into two groups: variable and fixed costs. This division helps to systematize the budgeting process, and also helps in planning a business development strategy.

Fixed costs are expenses that are not related to the production capacity of the enterprise.. This means that this amount does not depend on how much product will be manufactured.

Variable costs are costs that change in proportion to changes in the volume of production.

Variable costs include conditionally fixed costs associated with entrepreneurial activity. Such expenses can change their properties and value, depending on the impact of internal and external economic factors.

What are the different types of expenses?

The salary of members of the administration of the enterprise can be considered among the fixed costs, but only in the situation when these employees receive payments regardless of the financial condition of the organization. It is important to note that in foreign countries, managers earn income from their organizational skills by expanding their customer base and exploring new market areas. On the territory of Russia, the situation is completely different. Most department heads receive high salaries that are not tied to their performance.

This approach to the organization of the production process leads to a loss of incentive to achieve better results. This can explain the low productivity of labor indicators of many commercial institutions, since there is simply no desire to master new technological processes at the top of the company.

Speaking about what fixed costs are, it should be mentioned that this article includes rent.. Let's imagine a private company that does not have its own real estate and is forced to rent a small space. In this situation, the administration of the company must monthly transfer a certain amount to the landlord. This situation is considered standard, since it is quite difficult to recoup the purchase of real estate. Some small and middle class entities will need at least five years to return the invested capital.

It is this factor that explains the fact that many entrepreneurs prefer to conclude an agreement on the lease of the necessary square meters. As mentioned above, rent costs are fixed because the owner of the premises is not interested in the financial condition of your company. For this person, only the timely receipt of payment fixed in the contract is important.

Fixed costs include depreciation costs. Any funds must be amortized monthly until their initial value is equal to zero. There are many different ways of depreciation, which are regulated by current legislation. According to experts, there are more than a dozen different examples of fixed costs.. These include utility bills, payment for the removal and processing of garbage and spending on providing the conditions necessary for the implementation of labor activities. A key feature of such expenses is the ease of calculating both present and future costs.

Fixed costs - costs, the value of which almost does not depend on changes in the volume of production

The concept of "variable costs" includes those types of costs that depend on the proportional volume of manufactured goods. For example, consider a balance sheet item, where there is an item related to raw materials and materials. In this paragraph, you should indicate the amount of funds that the company will need for production purposes. As an example, consider the activities of a company engaged in the manufacture of wooden pallets. For the manufacture of one unit of goods, it is required to spend two squares of processed wood. This means that it takes two hundred square meters of material to make one hundred pallets. It is these costs that are classified as variables.

It should be noted that the remuneration of the labor activity of employees can be included in both fixed and variable expenses. Similar cases are observed in the following situations:

1. With an increase in the production capacity of the enterprise, it is required to attract additional workers who will be employed in the manufacturing process.
2. The salary of employees is a percentage that depends on various deviations in the production process.

Under these conditions, it is very difficult to make a forecast about the necessary expenses in order to pay salaries to employees, since its volume will depend on many different factors. The division of expenses into fixed and variable is carried out in order to analyze the profitability of the enterprise, as well as to determine the degree of unprofitability of the production process. It should be noted that in any production activity of the company, various energy resources are consumed. These resources include fuel, electricity, water and gas. Since their use is an integral part of production, an increase in the volume of products produced leads to an increase in the cost of these resources.

What are fixed and variable costs used for?

One of the goals of this classification of costs is the optimization of production costs. Taking into account such details during the creation of the financial model of the enterprise allows you to identify those positions that can be reduced to replenish income. Also, such data will help to find out how the cost reduction will affect the production capacity of the enterprise.

Below we propose to consider fixed and variable costs examples based on an organization engaged in the production of kitchen furniture. To carry out production activities, the management of such a company needs to invest finances in the payment of the lease agreement, utility costs, depreciation costs, the purchase of consumables and raw materials, as well as the salary of employees. After the list of total costs is compiled, all items on this list should be divided into variable and fixed costs.

Knowing and understanding the essence of fixed and variable costs is very important for competent business management.

The category of fixed costs includes depreciation costs, as well as the salary of the administration of the enterprise, including the accountant and director of the company. In addition, this article includes the cost of paying for electrical energy used to illuminate the premises. Variable costs include the purchase of raw materials and consumables needed to manufacture an incoming order. In addition, this article includes spending on utility bills, since some energy resources are used only in the production process itself. This category can include the wages of employees involved in the furniture manufacturing process, since the rate directly depends on the volume of products produced. Transportation costs are also included in the category of variable financial costs of the organization.

How do manufacturing costs affect the cost of a product?

After the financial model of the future enterprise has been created, it is necessary to analyze the impact of variable and fixed costs on the cost of manufactured goods. This allows you to reorganize the company's activities in order to optimize the production process. Such an analysis will help to understand how many personnel will be required to perform a particular task.

The division of costs into fixed and variable is one of the most important tasks of the financial departments of companies.

Such a plan allows you to determine the required level of investment in the development of the organization. It is possible to reduce the cost of energy resources by using alternative sources, as well as by purchasing more modernized equipment with a high efficiency. Further, it is recommended to analyze variable costs in order to determine their dependence on external factors. These actions will reveal those costs that can be counted.

All of the above actions allow you to better understand the cost structure of the enterprise, which allows you to modify the organization's activities in accordance with the chosen development strategy. The main goal is to lower the cost of the manufactured product in order to increase the number of products sold.