The sum of fixed and variable costs is. What are fixed and variable costs

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

However, costs are different types. 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. It requires investment of various amounts 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:

Explicit - this is a type of direct cash costs for making payments, commission payments to trading companies, payment for banking services, transportation costs, etc.;
Implicit, which include the cost of using the resources of the owners of the organization, not provided for by contractual obligations for explicit payment.
Permanent - this is an investment in order to ensure stable costs in the production process.
Variables are special costs that can be easily adjusted without affecting operations, depending on changes in output.
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.
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.
Marginal - this is the maximum amount of costs that cannot be increased due to the inefficiency of further investments in production.
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:

Payment for renting the premises in the amount of 25,000 rubles.
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

AT 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.

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Definition of fixed costs (costs)

Fixed expenses are the same amount every month. These bills cannot be easily changed and are usually paid on a regular basis: weekly, monthly, quarterly, or year after year.

Typical household fixed expenses (costs) are mortgage or rent payments, car payments, property taxes and insurance premiums. Theoretically, you are able to change your monthly mortgage payment by refinancing your loan or by reversing your property tax assessment. The same is true if you pay rent. You can change this score by moving to a cheaper house or by getting a roommate. Health insurance, car insurance, life insurance are also examples of fixed costs. You will have to spend several hours researching alternative plans to change these monthly payment amounts.

Definition of variable costs

Variable costs represent daily spending decisions such as eating out at a restaurant, buying clothes, drinking Starbucks, playing pool with friends, and daily necessities.

Most people spend a different amount each month on gas and paying for necessary car repairs and maintenance.

Differences between fixed costs and variables in economics

Fixed and variable costs are the two main costs in the production of goods and services. The total value of a company consists of its total fixed costs and its total variable costs. Variable costs vary with the amount of product produced. Fixed costs remain the same no matter how many products a company produces.

This distinction is a key part of understanding the financial characteristics of a business. If the cost structure consists mainly of fixed costs (for example, an oil refinery), managers are more likely to accept low-priced offers for their products in order to generate enough sales to cover fixed costs. This may lead to increased level of competition in the industry, since they all probably have the same cost structure and should cover their fixed costs. Once the fixed costs have been paid, all incremental sales tend to have a fairly high margin. This means that a high fixed cost business can make very big profits when sales are at their peak, but can take a big loss when sales are down.

If the cost structure consists primarily of variable costs (such as business services), managers must make a profit on every sale and are therefore less likely to accept low-priced offers from customers. These businesses can easily cover their small amounts of fixed costs. Variable costs make up a relatively high proportion of sales, so the profit generated from each individual sale is lower than in the high fixed cost scenario.

Examples of fixed costs are rent, insurance, depreciation, wage and utilities. Examples of variable costs (costs) are materials, commissions and credit card payments.

Variable costs are the value of a company that depends on the amount of goods or services it produces. For example, suppose company ABC produces $2 worth of ceramic mugs. If the company produces 500 units, its variable cost will be $1,000. If the company does not produce any units, it will not have any variable cost to make the mugs.

Fixed costs do not change with the volume of production. The fixed cost does not change with the amount of goods or services the company produces. It remains the same even if no goods or services are produced. Using the same example above, let's say Company ABC has a fixed fee of $10,000 per month for a cup making machine.

If a company doesn't produce any mugs for a month, it still has to pay $10,000 for the cost of renting a car. On the other hand, if it produces 1 million mugs, the fixed costs will remain unchanged. Variable costs vary from zero to $2 million in this example.

The difference between fixed and variable costs is that fixed costs do not change with the volume of activity, while variable costs are closely related to the volume of production. When the cost contains elements of fixed and variable costs, then such a cost is called - mixed.

The purpose of any business is to earn maximum profit, which is calculated as the difference between income and total costs. That's why financial results firms directly depends on the size of its costs. This article describes the fixed, variable and total costs of production and how they affect the current and future activities of the enterprise.

What are production costs

Under the production costs imply the cash costs of acquiring all the factors used to manufacture products. Most effective way production is considered to be the one that has the minimum value of the cost of producing a unit of goods.

The relevance of calculating this indicator is related to the problem of limited resources and alternative use, when the raw materials and materials used can only be used for their intended purpose, and all other ways of their use are excluded. Therefore, at each enterprise, the economist must carefully calculate all types of production costs and be able to choose the optimal combination of factors used so that the costs are minimal.

Explicit and implicit costs

Explicit or external costs include the costs incurred by the enterprise at the expense of suppliers of raw materials, fuel and service counterparties.

Implicit, or internal, costs of the enterprise are the income lost by the firm due to the independent use of its resources. In other words, it is the amount of money that the company could receive if the best way use of the available resource base. For example, divert a specific type of material from the production of product A and use it to make product B.

This division of costs is associated with different approaches to their calculation.

Methods for calculating costs

In economics, there are two approaches that are used to calculate the sum of production costs:

Accounting - production costs will include only the actual costs of the enterprise: wages, depreciation, social security contributions, payment for raw materials and fuel.
Economic - in addition to real costs, production costs include the cost of a missed opportunity for the optimal use of available resources.

Classification of production costs

There are two types of production costs:

Fixed costs (PI) - costs, the amount of which does not change in the short run and does not depend on the volume of manufactured products. That is, with an increase or decrease in production, the value of these costs will be the same. Such expenses include salaries of the administration, rent of premises.
Average fixed costs (AFI) are the fixed costs incurred per unit of output. They are calculated according to the formula:

PI = PI: Oh,
where O is the volume of production.
From this formula follows the dependence of average costs on the quantity of goods produced. If the firm increases the volume of production, then the overhead costs, respectively, will decrease. This pattern serves as an incentive to expand activities.

3. Variable production costs (Pri) - costs that depend on production volumes and tend to change with a decrease or increase in the total amount of manufactured goods (wages of workers, costs of resources, raw materials, electricity). This means that with the increase in the scale of activity, variable costs will increase. At first, they will increase in proportion to the volume of production. At the next stage, the enterprise will achieve cost savings with more production. And in the third period, due to the need to purchase more raw materials, variable production costs may increase. Examples of such a trend are the increased transportation finished products to the warehouse, payment to suppliers for additional batches of raw materials.

When making calculations, it is very important to distinguish between cost elements in order to calculate the correct cost of production. It should be remembered that the variable costs of production do not include property rental fees, depreciation of fixed assets, equipment maintenance.

4. Average variable costs (AMC) - the amount of variable costs incurred by the enterprise for the manufacture of a unit of goods. This indicator can be calculated by dividing the total variable costs by the volume of goods produced:

SPRI \u003d Pr: O.

The average variable costs of production do not change for a certain range of production volumes, but with a significant increase in the quantity of manufactured goods, they begin to increase. This is due to the large total costs and their heterogeneous composition.

5. Total costs (OI) - include fixed and variable production costs. They are calculated according to the formula:

OI \u003d PI + PRI.

That is, it is necessary to look for the reasons for the high indicator of total costs in its components.

6. Average total costs (ACOI) - show the total production costs that fall on a unit of goods:

SOI \u003d OI: O \u003d (PI + PRI) : O.

The last two indicators increase with the growth of production volumes.

Types of variable costs

Variable production costs do not always increase in proportion to the rate of increase in output. For example, an enterprise decided to produce more goods and for this purpose introduced a night shift. Payment for work at such times is higher, and as a result, the company will incur additional considerable costs.

Therefore, there are several types of variable costs:

Proportional - such costs increase at the same rate with the volume of output. For example, with a 15% increase in production, variable costs will also increase by the same amount.
Regressive - the growth rate of this type of cost lags behind the increase in the volume of goods; for example, with an increase in the quantity of manufactured products by 23%, variable costs will increase by only 10%.
Progressive - Variable costs of this type increase faster than the growth of production volume. For example, an enterprise increased output by 15%, and costs increased by 25%.

Costs in the short run

The short-term period is the period of time during which one group of factors of production is constant, and the other is variable. In this case, the stable factors include the area of the building, the size of structures, the amount of machinery and equipment used. Variable factors consist of raw materials, the number of employees.

Costs in the long run

The long run is the period of time in which all factors of production used are variable. The fact is that any company over a long period can change the premises to a larger or smaller one, completely renew equipment, reduce or expand the number of enterprises controlled by it, and adjust the composition of management personnel. That is, in the long run, all costs are considered as variable production costs.

When planning a long-term business, an enterprise must conduct a deep and thorough analysis of all possible costs and draw up the dynamics of future costs in order to reach the most efficient production.

Average costs in the long run

The enterprise can organize small, medium and large production. When choosing the scale of activity, the firm must take into account the main market indicators, the projected demand for its products and the cost of the required production capacity.

If the company's product is not in great demand and it is planned to produce a small amount of it, in this case it is better to create a small production. Average costs will be significantly lower than with a large output. If the assessment of the market showed a large demand for the product, then it is more profitable for the company to organize a large production. It will be more profitable and will have the lowest fixed, variable and total costs.

Choosing a more profitable production option, the company must constantly control all its costs in order to be able to change resources in time.

The purpose of most business entities is to make a profit from the sale of goods and the provision of services. However, in order to sell a product, you first need to purchase it from another company or produce it yourself. In both cases, the matter is not without costs.

Costs are the cost of the means consumed in the production process (in particular, materials, raw materials, labor of workers, etc.). In other words, these are all economic resources that were used to produce certain goods, expressed in a single monetary equivalent.

Costs that form the value of the final product, services rendered or work performed in a certain period and can be reliably estimated, constitute production costs.

Cost classification

Growing unprofitability of business entities various industries indicates the need to improve the efficiency of cost management. For their rational management, the costs of the enterprise are classified according to various criteria.

Each manufacturer, due to limited resources in the course of their activities, is faced with the need to compare several alternatives and stop at one of them. This choice is permanent. Costs play a key role in solving this problem. They allow you to estimate the cost of production of a particular product. That part of the costs, the value of which depends on a particular option, is taken into account. These costs are called relevant. It is them that management takes into account to make the best decision. Unlike them, irrelevant costs do not depend on the chosen alternative and will be incurred by the enterprise in any case.

In management accounting, sunk costs are also distinguished. None of the decisions taken can affect their value.

For the purpose of effective management, incremental and marginal costs are calculated. The first company bears when releasing an unplanned batch of products. The cost that a company incurs in producing one additional unit of output is called the marginal cost.

The costs of the enterprise are planned taking into account the expected production volumes, norms and limits. They refer to the planned cost of production. However, there are unplanned costs that actually arise. An example would be marriage.

Depending on whether the amount of costs incurred changes with output volumes, they are classified into fixed and variable production costs.

fixed costs

The peculiarity of the first is that they do not change in a short period of time. If the company decides to increase or, conversely, reduce output, such costs remain at the same level. Fixed costs are rent industrial premises, warehouses, outlets; salaries of administrative staff; building maintenance costs, in particular for utilities. However, it must be taken into account that only the size of the total costs for the entire output is constant. Costs calculated per unit of output will decrease in direct proportion to the increase in production volumes. This is a regularity.

Variable production costs

As soon as a business entity begins to produce products, variable costs arise. Their main share is formed by the used working capital. While fixed costs remain relatively stable for the enterprise, variables directly depend on output volumes. The higher the volume of production, the higher the costs, respectively.

Composition of variable costs

Variable production costs include the cost of materials and raw materials. In the course of their planning, material consumption rates are used for the calculation relative to a unit of the finished product.

The next item of variable costs is labor costs. These include the salary of the main personnel involved in production, auxiliary employees, craftsmen, technologists, as well as service personnel (loaders, cleaners). In addition to the basic salary, bonuses, compensation and incentive amounts, as well as the remuneration of employees who are not in the main state, are taken into account here.

In addition to materials and raw materials, most business entities incur costs for the purchase of auxiliary materials, semi-finished products, spare parts, components and fuel, without which, in most cases, the production process is impossible.

Classification of variable costs

As noted earlier, the value of variable costs depends on the volume of output. However, these indicators do not always change in equal proportions. According to the nature of the dependence of costs on the quantity of products produced, they are classified into progressive, digressive and proportional.

According to the method of including variable costs in the cost of production, they are divided into direct and indirect. If the former are immediately transferred to the value of the issued good, then the latter are distributed among different types of products. For this, a distribution base is selected. It can be the cost of raw materials or the salary of the main workers. Indirect costs of production are represented by administrative and management costs, the cost of staff development, the social sphere and production infrastructure.

For effective management, the total and average variable costs of production are calculated. To determine the latter indicator, the total cost is divided by the number of products produced.

Gross production costs of the enterprise

In order to assess the profitability of the production of a particular product, the company needs to calculate the gross (total) costs. In the short term, they are formed by a combination of variable and fixed costs. If, for some reason, the enterprise does not produce products, then the gross costs are equal to the fixed ones. As the volume of production increases in the course of economic activity, the total costs increase by the sum of the variables, depending on the quantity of manufactured products.

There are a large number of ways in which a company makes a profit, and the fact of cost is important. The costs are real costs carried by the company in its operation. If a company is unable to pay attention to the category of costs, then the situation may become unpredictable and profit margins may decrease.

Fixed production costs must be analyzed when constructing their classification, with which you can determine the idea of their properties and main characteristics. The main classification of production costs includes fixed, variable, general costs.

Fixed costs of production

Fixed costs of production are an element of the break-even point model. They are costs regardless of the volume of output and are opposed to variable costs. The sum of fixed and variable costs represent the total costs of the enterprise. Fixed costs can be made up of several elements:

room rental,
deductions for depreciation,
management and administrative staff costs,
the cost of machines, machinery and equipment,
security of premises for production,
payment of interest on loans to banks.

Fixed costs are represented by the costs of enterprises, which are unchanged in short periods and do not depend on changes in production volumes. This type of cost must be paid even if the enterprise does not produce anything.

Average fixed costs

Average fixed costs can be obtained by calculating the ratio of fixed costs and output. Thus, average fixed costs represent the fixed cost of producing products. In sum, fixed costs do not depend on production volumes. For this reason, average fixed costs will tend to decrease as the number of products produced increases. This is due to the fact that with an increase in production volumes, the amount of fixed costs is distributed over a larger number of products.

Features of fixed costs

Fixed costs in the short run do not change with changes in output. Fixed costs are sometimes referred to as sunk costs or overheads. Fixed costs include the costs of maintaining buildings, space, and purchasing equipment. The fixed cost category is used in several formulas.

Thus, when determining total costs (TC), a combination of fixed and variable costs is needed. The total costs are calculated by the formula:

This type of cost increases with the increase in production volumes. There is also a formula for determining the total fixed costs, which are calculated by dividing the fixed costs by a certain volume of manufactured products. The formula looks like this:

Average fixed costs are used to calculate average total costs. Average total costs are found through the sum of average fixed and variable costs according to the formula:

Fixed costs in the short run

In the production of products, living and past labor has been expended. In this case, each enterprise seeks to obtain the greatest profit from its operation. In this case, each enterprise can go in two ways - to sell products more expensively or to reduce their production costs.

In accordance with the time it takes to change the amount used in production processes resources, it is customary to distinguish between long-term and short-term periods of the enterprise. The short-term interval is the time interval during which the size of the enterprise, its output and costs change. At this time, the change in the volume of products occurs through a change in the volume of variable costs. In short-term periods, an enterprise can quickly change only variable factors, including raw materials, labor, fuel, and auxiliary materials. The short run divides costs into fixed and variable. During such periods, fixed costs are mainly provided, determined by fixed costs.

The fixed costs of production get their name in accordance with their invariable nature and independence in relation to the volume of production.