The concept and types of production costs. The main thing is the analysis of economic activity

Production costs include the costs required to produce a product or service. For any enterprise, production costs and their types can act as payment for acquired production factors. When costs are examined from the point of view of an individual enterprise, one can speak of private costs. If there is an analysis of costs from the point of view of the whole society, then it becomes necessary to take into account the total costs.

Social costs are characterized by positive and negative externalities. Private social costs can only coincide when there are no externalities or their net effect is zero. Thus, we can say that social costs are equal to the sum of private costs and externalities.

Production costs and their types

Fixed costs include the costs determined by the enterprise within one production cycle. The value and list of fixed costs is determined by each company independently, these costs will be present in all cycles of the release of goods.

Production costs and their types include variable costs that can be fully transferred to the finished product. By adding fixed and variable costs, we get the total costs incurred by the company during each stage of production.

There is also a classification of costs into accounting and economic costs. Accounting costs include the cost of resources used by the enterprise in the actual prices of their acquisition. Accounting costs are explicit costs.

Production costs and their types include economic costs, which are the cost of other benefits that can be obtained with the most favorable variant of the use of resources. Economic costs are opportunity costs, including the sum of explicit and implicit costs. Accounting and economic costs may or may not coincide with each other.

Explicit and implicit costs

Production costs and their types imply a classification into explicit and implicit costs. Explicit costs can be defined as the amount of costs a company pays for external resources that are not owned. It can be materials, fuel, labor and raw materials.

Implicit costs can be determined by the cost of internal resources that are owned by this enterprise. The main example of implicit costs is represented by the wages that an entrepreneur might receive if he were employed.

Explicit costs are opportunity costs that can take the form of cash payments to suppliers of inputs and intermediate products. Explicit costs include payment for transport, rent, wages to employees, cash costs for the purchase of equipment, buildings and structures, payment for the services of banks and insurance companies.

Other types of costs

Production costs and their types can be returnable and irrevocable. In the broad sense of the word, sunk costs are expenses that the enterprise is not able to return, even if it ceases to operate. This may be the preparation of advertising and obtaining a license, the cost of registering an enterprise.

In a narrow sense, sunk costs represent the costs of those types of resources that do not have alternative uses. If the equipment cannot be used alternatively, then it can be said that its opportunity cost is zero.

There is also a classification of costs into fixed and variable. If we consider the short run, then part of the resources will remain unchanged, part will change in order to increase or decrease the total output.

Fixed and variable costs

The division of costs into fixed and variable makes sense only for the short term. If we consider long-term periods, then such a division will lose its meaning, since all costs change, that is, they are variable.

We can say that fixed costs do not depend on how many products the company has produced in the short run. This can be depreciation, interest payments on bonds, rental payments, insurance payments, salaries of management personnel. Variable costs depend on the volume of output, and include costs for variable production factors (transport costs, utility bills, payment for raw materials and materials, etc.).

PRODUCTION COSTS - the cost of purchasing economic resources consumed in the process of issuing certain goods.

Any production of goods and services, as you know, is connected with the use of labor, capital and natural resources, which are factors of production, the cost of which is determined by production costs.

Due to the limited resources, the problem arises of how best to use them from all the rejected alternatives.

opportunity cost- these are the costs of issuing goods, determined by the cost of the best missed opportunity to use production resources, providing maximum profit. The opportunity cost of a business is called economic cost. These costs must be distinguished from accounting costs.

Accounting costs differ from economic costs in that they do not include the cost of factors of production that are the property of firm owners. Accounting costs are less than economic costs by the value of the implicit earnings of the entrepreneur, his wife, implicit land rent and implicit interest on the owner's own capital. In other words, accounting costs are equal to economic costs minus all implicit costs.

Variants of classification of production costs are diverse. Let's start by distinguishing between explicit and implicit costs.

Explicit costs- These are opportunity costs that take the form of cash payments to owners of production resources and semi-finished products. They are determined by the amount of the company's expenses to pay for the purchased resources (raw materials, materials, fuel, labor, etc.).

Implicit (imputed) costs- ego opportunity costs of using resources that belong to the firm and take the form of lost income from the use of resources that are the property of the firm. They are determined by the cost of resources owned by the firm.

The classification of production costs can be carried out taking into account mobility production factors. You-share permanent, variables And general costs.

Fixed Costs (FC)- costs, the value of which in the short period does not change depending on changes in the volume of production. They are sometimes called "overhead costs" or "sunk costs". Fixed costs include the costs of maintaining production buildings, purchasing equipment, rent payments, interest payments on debts, salaries of management personnel, etc. All these costs must be financed even when the company does not produce anything.

Variable Costs (VC)- costs, the value of which varies depending on the change in the volume of production. If production is not produced, then they are equal to zero. Variable costs include the cost of purchasing raw materials, fuel, energy, transportation services, wages for workers and employees, etc. In supermarkets, the payment for the services of supervisors is included in variable costs, since managers can adjust the amount of these services to the number of buyers.

Total costs (TC) - the total costs of the firm, equal to the sum of its fixed and variable costs, are determined by the formula:

General costs increase as the volume of production increases.

The cost per unit of goods produced has the form average constants costs mean variables costs and average general costs.

Average fixed costs (AFC) are the general fixed costs per unit of production. 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 number of outputs increases, because 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) are the general variable costs per unit of output. They are determined by dividing variable costs by the corresponding amount of output:

Average variable costs first fall, reaching their minimum, then begin to rise.

Average (total) costs (ATS) are the total costs of production per unit of output. They are defined in two ways:

a) by dividing the sum of total costs by the quantity of goods produced:

ATS = TS / Q;

b) by summing average fixed costs and average variable costs:

ATC = AFC + AVC.

Initially, the average (total) costs are high, because a small amount of output is produced, and fixed costs are large. As the volume of production increases, average (total) costs decrease and reach a minimum, and then begin to grow.

Marginal Cost (MC) is the cost of producing an additional unit of output.

Marginal costs are equal to the change in total costs divided by the change in the volume of output, i.e. they reflect the change in costs depending on the quantity of output. Since the fixed costs do not change, the constant marginal costs are always equal to zero, i.e. MFC = 0. Therefore, marginal costs are always marginal variable costs, i.e. MVC = MC. It follows from this that increasing returns to variable factors reduce marginal costs, while falling returns, on the contrary, increase them.

Marginal cost shows the amount of costs that the firm will incur if the production of the last unit of output increases, or the money that it saves if production decreases by this unit. When 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.

Firm. Production costs and their types.

Parameter name	Meaning
Article subject:	Firm. Production costs and their types.
Rubric (thematic category)	Production

Firm(enterprise) is an economic link that realizes its own interests through the manufacture and sale of goods and services through the systematic combination of production factors.

All firms can be classified according to two main criteria: the form of ownership of capital and the degree of concentration of capital. In other words: who owns the firm and what is its size. According to these two criteria, various organizational and economic forms of entrepreneurial activity are distinguished. This includes state and private (sole, partnerships, joint-stock) enterprises. According to the degree of concentration of production, small (up to 100 people), medium (up to 500 people) and large (more than 500 people) enterprises are distinguished.

Determining the size and cost structure of an enterprise (firm) for the production of products that would provide the enterprise with a stable (equilibrium) position and prosperity in the market is the most important task of economic activity at the micro level.

production costs - these are expenses, cash expenditures that are extremely important to carry out to create a product. For an enterprise (firm), they act as payment for the acquired factors of production.

Most of the cost of production is the use of production resources. If the latter are used in one place, they cannot be used in another, as they have such properties as rarity and limitedness. For example, the money spent on the purchase of a blast furnace for the production of pig iron cannot be simultaneously spent on the production of ice cream. As a result, using some resource in a certain way, we lose the opportunity to use this resource in some other way.

By virtue of this circumstance, any decision to produce something makes it extremely important not to use the same resources for the production of some other types of products. Thus, costs are opportunity costs.

opportunity cost- this is the cost of producing a good, estimated in terms of the lost opportunity to use the same resources for other purposes.

From an economic point of view, opportunity costs can be divided into two groups: ʼʼexplicitʼʼ and ʼʼimplicitʼʼ.

Explicit costs are opportunity costs that take the form of cash payments to suppliers of factors of production and intermediate products.

Explicit costs include: wages of workers (cash payment to workers as suppliers of the factor of production - labor); cash costs for the purchase or payment for the lease of machine tools, machinery, equipment, buildings, structures (monetary payment to suppliers of capital); payment of transport costs; utility bills (electricity, gas, water); payment for services of banks, insurance companies; payment of suppliers of material resources (raw materials, semi-finished products, components).

Implicit costs - is the opportunity cost of using resources owned by the firm itself, ᴛ.ᴇ. unpaid expenses.

Implicit costs are presented as:

1. Cash payments that the firm could receive with a more profitable use of its resources. This can also include lost profits (ʼʼopportunity costsʼʼ); the wages that an entrepreneur could have earned by working elsewhere; interest on capital invested in securities; land rents.

2. Normal profit as the minimum remuneration to the entrepreneur, keeping him in the chosen branch of activity.

For example, an entrepreneur engaged in the production of fountain pens considers it sufficient for himself to receive a normal profit of 15% of the invested capital. And if the production of fountain pens gives the entrepreneur less than a normal profit, he will transfer his capital to industries that give at least a normal profit.

3. It is important to note that 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). For a peasant - the owner of the land - such implicit costs will be the rent that he could receive by renting out his land. For an entrepreneur (including a person engaged in ordinary labor activity), the implicit costs will be the salary that he could receive for the same time, working for hire at any firm or enterprise.

Τᴀᴋᴎᴍ ᴏϬᴩᴀᴈᴏᴍ, Western economic theory includes the entrepreneur's income in production costs. At the same time, such income is perceived as a payment for risk, which rewards the entrepreneur and encourages him to keep his financial assets within the limits of this enterprise and not divert them for other purposes.

Production costs, including normal or average profit, are economic costs.

Economic or opportunity costs in modern theory consider the costs of the company, carried out in the conditions of making the best economic decision on the use of resources. This is the ideal to which the firm should strive. Of course, the real picture of the formation of general (gross) costs is somewhat different, since any ideal is difficult to achieve.

It must be said that economic costs are not equivalent to those with which accounting operates. IN accounting costs the profit of the entrepreneur is not included at all.

Production costs, which are operated by economic theory, in comparison with accounting, are distinguished by the assessment of internal costs. The latter are associated with the costs that are incurred due to the use of own products in the production process. For example, part of the grown crop is used for sowing the company's land areas. The company uses such grain for internal needs and does not pay for it.

In accounting, internal costs are accounted for at cost. But from the standpoint of the formation of the price of the released goods, such costs should be estimated at the market price of that resource.

Internal costs - it is associated with the use of its own products, which turns into a resource for the further production of the company.

External costs - it is the expenditure of money that is realized to acquire resources that are the property of those who do not belong to the owners of the firm.

Production costs that are realized in the production of goods can be classified not only depending on what resources are used, whether it is the resources of the firm or the resources that had to be paid for. Another classification of costs is also possible.

Fixed, variable and total costs

The costs that a firm incurs in producing a given volume of output depend on the possibility of changing the amount of all resources employed.

fixed costs(FC, fixed costs) are costs that do not depend in the short run on how much the firm produces. Οʜᴎ represent the costs of its fixed factors of production.

Fixed costs are associated with the very existence of the firm's production equipment and must be paid for in connection with this, even if the firm does not produce anything. A firm can only avoid the costs of its fixed factors of production by completely shutting down its operations.

variable costs(VS, variable costs) These are costs that depend on the volume of output of the firm. Οʜᴎ represent the costs of the firm's variable factors of production.

These include the cost of raw materials, fuel, energy, transport services, etc. Most of the variable costs, as a rule, account for the costs of labor and materials. Since the costs of variable factors increase with the growth of output, the variable costs also increase with the growth of output.

General (gross) costs per produced quantity of goods - these are all the costs at a given point in time necessary for the production of a particular product.

In order to more clearly define the possible production volumes at which the firm guarantees itself against an excessive increase in production costs, the dynamics of average costs is investigated.

Distinguish between average constants (A.F.C.). average variables (AVC) PI averages overall (ATS) costs.

Average fixed costs (AFS) is the ratio of fixed costs (FC) to the output:

AFC=FC/Q.

Average variable costs (AVQ are the ratio of variable costs (VC) to the output:

AVC=VC/Q.

Average total cost (ATS) are the ratios of total costs (TC)

to the output:

ATS= TC/Q=AVC+AFC,

because TS= VC+FC.

Average cost is used to decide whether to produce a given product at all. In particular, if the price, which is the average income per unit of output, is less than AVC, then the firm will reduce its losses by suspending its activities in the short run. If the price is lower ATS, then the firm receives a negative economic; profit and should consider final closure. Graphically, this position should be depicted as follows.

If the average cost is below the market price, then the firm can operate profitably.

To understand whether it is profitable to produce an additional unit of output, it is extremely important to compare the resulting change in income with the marginal cost of production.

marginal cost(MS, marginal costs) - is the cost of producing an additional unit of output.

In other words, marginal cost is the increase TS, a firm must go to ĸᴏᴛᴏᴩᴏᴇ to produce another unit of output:

MS= Changes in TS/ Changes in Q (MS = TC/Q).

The concept of marginal cost is of strategic importance because it defines costs that the firm can directly control.

The point of equilibrium of the firm and maximum profit is reached in the case of equality of marginal revenue and marginal cost.

When the firm has reached this ratio, it will no longer increase production, output will become stable, hence the name - the equilibrium of the firm.

Firm. Production costs and their types. - concept and types. Classification and features of the category "Firm. Production costs and their types." 2017, 2018.

Firm(enterprise) is an economic link that realizes its own interests through the manufacture and sale of goods and services through the systematic combination of production factors.

Determination of the value and cost structure of an enterprise (firm) for the production of products that would provide the enterprise with a stable (equilibrium) position and prosperity in the market is the most important task of economic activity at the micro level.

production costs - These are costs, cash expenditures that must be made to create a product. For an enterprise (firm), they act as payment for the acquired factors of production.

Most of the cost of production is the use of production resources. If the latter are used in one place, then they cannot be used in another, since they have such properties as rarity and limitedness. For example, the money spent on the purchase of a blast furnace for the production of pig iron cannot be simultaneously spent on the production of ice cream. As a result, by using some resource in a certain way, we lose the ability to use this resource in some other way.

By virtue of this circumstance, any decision to produce something necessitates the refusal to use the same resources for the production of some other types of products. Thus, costs are opportunity costs.

opportunity cost- this is the cost of producing a good, estimated in terms of the lost opportunity to use the same resources for other purposes.

From an economic point of view, opportunity costs can be divided into two groups: "explicit" and "implicit".

Explicit costs are opportunity costs that take the form of cash payments to suppliers of factors of production and intermediate products.

Implicit costs - this is the opportunity cost of using resources owned by the firm itself, i.e. unpaid expenses.

Implicit costs can be represented as:

1. Cash payments that the firm could receive with a more profitable use of its resources. This can also include lost profits (“opportunity costs”); the wages that an entrepreneur could have earned by working elsewhere; interest on capital invested in securities; land rents.

2. Normal profit as the minimum remuneration to the entrepreneur, keeping him in the chosen branch of activity.

3. 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). For the peasant - the owner of the land - such implicit costs will be the rent that he could receive by renting out his land. For an entrepreneur (including a person engaged in ordinary labor activity), the implicit costs will be the wages that he could receive for the same time, working for hire at any firm or enterprise.

Thus, the income of the entrepreneur is included in the cost of production by Western economic theory. At the same time, such income is considered as a payment for risk, which rewards the entrepreneur and stimulates him to keep his financial assets within the limits of this enterprise and not divert them for other purposes.

Production costs, including normal or average profit, are economic costs.

It must be said that economic costs are not equivalent to those with which accounting operates. IN accounting costs the profit of the entrepreneur is not included at all.

Production costs, which are operated by economic theory, in comparison with accounting, are distinguished by the assessment of internal costs. The latter are associated with the costs that are incurred through the use of own products in the production process. For example, part of the grown crop is used for sowing the company's land areas. The company uses such grain for internal needs and does not pay for it.

Internal costs - it is associated with the use of its own products, which turns into a resource for the further production of the company.

External costs - it is the expenditure of money that is made to acquire resources that are the property of those who are not the owners of the firm.

Production costs that are incurred in the production of goods can be classified not only depending on what resources are used, whether they are the resources of the firm or the resources that had to be paid for. Another classification of costs is also possible.

Fixed, variable and total costs

The costs that a firm incurs in the production of a given volume of output depend on the possibility of changing the amount of all resources employed.

fixed costs(FC, 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 are related to the very existence of the firm's production equipment and must therefore be paid even if the firm does not produce anything. A firm can only avoid the costs of its fixed factors of production by completely shutting down its operations.

variable costs(VS, variable costs) These are costs that depend on the volume of output of the firm. They represent the costs of the firm's variable factors of production.

General (gross) costs per produced quantity of goods - this is all the costs at a given point in time necessary for the production of a particular product.

In order to more clearly define the possible production volumes at which the firm guarantees itself against an excessive increase in production costs, the dynamics of average costs is examined.

Distinguish between average constants (A.F.C.). average variables (AVC) PI averages overall (ATS) costs.

Average fixed costs (AFS) is the ratio of fixed costs (FC) to the output:

AFC=FC/Q.

Average variable costs (AVQ is the ratio of variable costs (VC) to the output:

AVC=VC/Q.

Average total cost (ATS) are the ratios of total costs (TC)

to the output:

ATS= TC/Q=AVC+AFC,

because TS= VC+FC.

If the average cost is below the market price, then the firm can operate profitably.

To understand whether it is profitable to produce an additional unit of output, it is necessary to compare the subsequent change in income with the marginal cost of production.

marginal cost(MS, marginal costs) - is the cost of producing an additional unit of output.

In other words, marginal cost is an increase TS, the amount the firm must pay to produce one more unit of output:

MS= Changes in TS/ Changes in Q (MS = TC/Q).

The concept of marginal cost is of strategic importance because it defines costs that the firm can directly control.

The point of equilibrium of the firm and maximum profit is reached in the case of equality of marginal revenue and marginal cost.

When the firm has reached this ratio, it will no longer increase production, output will become stable, hence the name - the equilibrium of the firm.

The costs that enterprises and organizations incur to create goods in order to eventually get the necessary profit from them are production costs.

Each production of services and goods is associated with the use of factors of production: labor, natural resources and capital. The cost of these factors is determined by the cost of production.

How to make the most of these factors, given that resources are limited? This problem is relevant for every enterprise.

Production costs are classified according to the method of estimating costs and in relation to the scale of production.

Cost classification

If we evaluate the purchase and sale as a seller, then in order to profit from the transaction, it is necessary first of all to recoup the costs incurred by the organization in the production of goods.

The rule of least cost states that the cost of any quantity of output is minimized if the marginal product for each unit of cost of each resource is the same.

If for any reason the level of costs changes, then the cost schedules shift. When costs go down, the graphs move down; when they rise, the graphs move up accordingly.

Cost minimization is one of the main and important sources of increasing the competitiveness of each enterprise.

With the current market prices for goods and services, cost reduction brings additional profitable profit, which means the prosperity and success of any enterprise.

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