Describe the fixed and variable costs of production. Fixed and variable costs of production. Average variable costs
We cited the classification of production costs. We have pointed out that the costs in relation to the volume of production are divided into fixed and variable. We will tell you more about them in our material.
What costs depend on the volume of production
Organizational costs that increase as production increases are called variable costs. The simplest and most understandable version of variable costs is proportional costs. Proportional costs are costs that are proportional to the volume of production.
Let's take an example. For the manufacture of 1 pc. product A requires 5 kg of base material. The cost of 1 kg. material - 100 rubles. Accordingly, in the production of 800 pcs. product A, the main material in the amount of 400,000 rubles will be consumed. (800 pieces * 5 kg / piece * 100 rubles / kg).
If the volume of production doubles to 1,600 pieces, the cost of materials will also double and amount to 800,000 rubles (1,600 pieces * 5 kg/piece * 100 rubles/kg).
Keep in mind that certain conditions are assumed when calculating proportional costs. For example, in our example, it is assumed that with an increase in the volume of purchases of materials, its price per 1 kg will not change.
But in practice, as a rule, the so-called “scale effect” comes into force. Therefore, variable costs are more often still conditionally variable costs.
fixed costs
Costs that do not depend on the volume of production are called fixed. This means that regardless of the volume of production, the organization always incurs fixed costs. And given that the total cost of the organization is determined by the addition of fixed and variable costs, we can say that the total cost at zero production is equal to the value of fixed costs. After all, if a manufacturing company in reporting period does not produce anything, it will still have to pay the rent of the premises and pay the salaries of the management staff.
Unit fixed costs
In the analysis of fixed costs of interest are specific fixed costs, which are defined as the amount of fixed costs per unit of output. Specific fixed costs decrease with the growth of production volume. Let's show this with an example.
The amount of fixed costs for the reporting period is 100,000 rubles, and the volume of output is 10,000 pieces. Therefore, the fixed costs per unit of production are 10 rubles (100,000 rubles / 10,000 pieces). If in the next reporting period the volume of output increases to 12,000 units, the unit fixed costs will decrease to 8.33 rubles (100,000 rubles / 12,000 units).
However, fixed costs in practice are also conditionally fixed in nature. This means that at a given level of production, costs that are defined as fixed costs can either increase or decrease. For example, the rental of a warehouse space, which is accounted for as a fixed expense, will also increase with a significant increase in sales, since the old warehouse will not be able to accommodate the volume of production and the company will have to rent another room.
Marginal cost and output
Marginal cost is the cost associated with producing an additional unit of output. This means that marginal cost arises as output increases. However, it is not always easy to calculate their value, because their size is not only variable costs per unit of output, but also part of the semi-fixed costs that may additionally arise with an increase in production volume.
variable costs These are costs, the value of which depends on the volume of output. Variable costs are opposed fixed costs which add up to total costs. The main sign by which it is possible to determine whether costs are variable is their disappearance during a stop in production.
Note that variable costs are the most important indicator of an enterprise in management accounting, and are used to create plans to find ways to reduce their weight in total costs.
What is variable cost
Variable costs have the main distinguishing feature - they vary depending on the actual production volumes.
Variable costs include costs that are constant per unit of output, but their total amount is proportional to the volume of output.
Variable costs include:
raw material costs;
energy resources involved in the main production;
main salary production staff(together with charges);
the cost of transport services.
These variable costs are directly charged to the product.
In value terms, variable costs change when the price of goods or services changes.
How to find variable costs per unit of output
In order to calculate the variable costs per piece (or other unit of measure) of the products manufactured by the company, you should divide the total amount of variable costs incurred by the total number of finished products, expressed in natural values.
Classification of variable costs
In practice, variable costs can be classified according to the following principles:
According to the nature of the dependence on the volume of output:
proportional. That is, variable costs increase in direct proportion to the increase in output. For example, the volume of production increased by 30% and the amount of costs also increased by 30%;
degressive. As production increases, the company's variable costs decrease. So, for example, the volume of production increased by 30%, while the size of variable costs increased by only 15%;
progressive. That is, variable costs increase relatively more with output. For example, the volume of production increased by 30%, and the amount of costs by 50%.
Statistically:
are common. That is, variable costs include the totality of all variable costs of the enterprise across the entire product range;
average - average variable costs per unit of production or group of goods.
According to the method of attribution to the cost of production:
variable direct costs - costs that can be attributed to the cost of production;
variable indirect costs - costs that depend on the volume of production and it is difficult to assess their contribution to the cost of production.
In relation to the production process:
production;
non-production.
Direct and indirect variable costs
Variable costs are either direct or indirect.
Production variable direct costs are costs that can be attributed directly to the cost of specific products based on primary accounting data.
Production variable indirect costs are costs that are directly dependent or almost directly dependent on the change in the volume of activity, however, due to the technological features of production, they cannot or are not economically feasible to be directly attributed to manufactured products.
The concept of direct and indirect costs is disclosed in paragraph 1 of Article 318 of the Tax Code of the Russian Federation. Thus, according to tax legislation, direct expenses, in particular, include:
expenses for the purchase of raw materials, materials, components, semi-finished products;
wages of production personnel;
depreciation on fixed assets.
Note that enterprises can include in direct costs and other types of costs directly related to the production of products.
At the same time, direct expenses are taken into account when determining the tax base for income tax as products, works, services are sold, and written off to the tax cost as they are implemented.
Note that the concept of direct and indirect costs is conditional.
For example, if the main business is transport services, then drivers and depreciation of cars will be direct costs, while for other types of business, the maintenance of vehicles and the remuneration of drivers will be indirect costs.
If the cost object is a warehouse, then the storekeeper's wages will be included in direct costs, and if the cost object is the cost of manufactured and sold products, then these costs (storekeeper's wages) will be indirect costs due to the impossibility of unambiguously and in the only way to attribute it to the object costs - cost.
Examples of Direct Variable Costs and Indirect Variable Costs
Examples of direct variable costs are costs:
for the wages of workers involved in manufacturing process, including accruals on their salaries;
basic materials, raw materials and components;
electricity and fuel used in the operation of production mechanisms.
Examples of indirect variable costs:
raw materials used in complex production;
expenses for research and development, transportation, travel expenses, etc.
conclusions
Due to the fact that variable costs change in direct proportion to the production volume, and the same costs per unit of finished product usually remain unchanged, when analyzing this type of cost, the value per unit of production is initially taken into account. In connection with this property, variable costs are the basis for solving many production problems related to planning.
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Variable Costs: Accountant Details
- Operational leverage in the main and paid activities of the BU
They are useful. Management of fixed and variable costs, as well as their associated operational ... in the structure of the cost of fixed and variable costs. the effect operating lever arises ... variables and conditionally constants. Conditionally variable costs change in proportion to the change in the volume of provided ... constant. Conditionally fixed costs Conditionally variable costs Maintaining and maintaining buildings and ... the price of the service falls below the variable costs, it remains only to curtail production, ...
- Financing the state task: examples of calculations
- Does it make sense to divide costs into variable and fixed costs?
It is the difference between revenue and variable costs, shows the level of reimbursement of fixed ... costs; PermZ - variable costs for the entire volume of production (sales); permS - variable costs per unit...increased. Accumulation and distribution of variable costs When choosing a simple direct costing ... semi-finished products of own production are taken into account at variable costs. Moreover, complex raw materials, with ... The total cost on the basis of the distribution of variable costs (for output) will be ...
- Dynamic (temporary) profitability threshold model
For the first time he mentioned the concepts of "fixed costs", "variable costs", "progressive costs", "degressive costs". ... The intensity of variable costs or variable costs per working day (day) is equal to the product of the value of variable costs per unit ... total variable costs - the value of variable costs per unit of time, calculated as the product of variable costs by ... respectively, total costs, fixed costs, variable costs and sales. The above integration technology...
- Director's questions to which the chief accountant should know the answers
Equality: revenue = fixed costs + variable costs + operating profit. We are looking for... products = fixed cost/ (price - variable cost/unit) = fixed cost: marginal... fixed cost + target profit) : (price - variable cost/unit) = (fixed cost + target profit ... equation: price = ((fixed costs + variable costs + target profit) / target sales volume ... , in which only variable costs are taken into account. Marginal profit - revenue ...
Example 2. In the reporting period, variable costs for the release of finished products, reflected .... The cost of production includes variable costs in the amount of 5 million rubles... Debit Credit Amount, rub. Reflected variable costs 20 10, 69, 70, ... Part of general factory costs added to the variable costs that form the cost 20 25 1 ... Debit Credit Amount, rub. Variable costs are reflected 20 10, 69, 70, ... Part of general factory costs is added to the variable costs that form the cost price 20 25 1 ...
There are several cost classifications enterprises: accounting and economic, explicit and implicit, permanent, variable and gross, returnable and non-returnable, etc.
Let's dwell on one of them, according to which all costs can be divided into fixed and variable. At the same time, it should be understood that such a division is possible only in the short term, since over long time periods all costs can be attributed to variables.
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What are fixed costs of production
Fixed costs are costs that a firm incurs whether or not it produces a product. This type of cost does not depend on the volume of products or services provided. Alternative names for these costs are overhead or sunk costs. The company ceases to bear this type of cost only in the event of liquidation.
Fixed Costs: Examples
Fixed costs in the short run can include the following types of expenses of the enterprise:
However, when calculating the average value fixed costs (this is the ratio of fixed costs to the volume of output), the amount of such costs per unit of output will be the lower, the greater the volume of production.
Variable and total costs
In addition, the company also has variable costs - this is the cost of raw materials and inventory, which are fully used within each production cycle. They are called variables because the amount of such costs is directly dependent on the volume of output.
Value fixed and variable costs during one production cycle is called gross or total costs. The whole set of expenses incurred by the enterprise that affect the cost of a unit of output is called the cost of production.
These indicators are necessary for financial analysis activities of the company, calculation of its efficiency, search for the possibility of reducing the cost of products manufactured by the enterprise, increasing the competitiveness of the organization.
Reducing average fixed costs can be achieved by increasing the volume of products or services provided. The lower this indicator, the lower the cost of products (services) and the higher the profitability of the company.
In addition, the division into fixed and variable costs is very conditional. At different times, using different approaches to their classification, costs can be classified as both fixed and variable. Most often, the management of the enterprise itself decides which costs to attribute to variable or overhead costs.
Examples of costs that can be attributed to one or the other type of costs are:
Fixed costs (TFC), variable costs (TVC) and their schedules. Determination of total costs
In the short run, some resources remain unchanged, while others change to increase or decrease total output.
In accordance with this, the economic costs of the short-term period are divided into fixed and variable costs. In the long run, this division loses its meaning, since all costs can change (i.e., they are variable).
Fixed Costs (FC) are costs that do not depend in the short run on how much the firm produces. They represent the costs of its fixed factors of production.
Fixed costs include:
- - payment of interest on bank loans;
- - depreciation deductions;
- - payment of interest on bonds;
- - salaries of management personnel;
- - rent;
- - insurance payments;
Variable Costs(VC) These are costs that depend on the firm's output. They represent the costs of the firm's variable factors of production.
Variable costs include:
- - wage;
- - fare;
- - electricity costs;
- - the cost of raw materials and materials.
From the graph we see that the wavy line depicting variable costs rises with an increase in production volume.
This means that as production increases, variable costs increase:
initially they rise in proportion to the change in output (until point A is reached)
then savings in variable costs are achieved in mass production, and the rate of their growth decreases (until point B is reached)
the third period, reflecting the change in variable costs (moving to the right from point B), is characterized by an increase in variable costs due to a violation of the optimal size of the enterprise. This is possible with an increase in transportation costs due to the increased volumes of imported raw materials, the volumes of finished products that need to be sent to the warehouse.
General (gross) costs (TC)- is all the costs at a given point in time, necessary for the production of a product. TC = FC + VC
Formation of the curve of average long-term costs, its schedule
The scale effect is a phenomenon of the long run, when all resources are variable. This phenomenon should not be confused with the known law of diminishing returns. The latter is a phenomenon of an extremely short period, when fixed and variable resources interact.
At constant prices for resources, economies of scale determine the dynamics of costs in the long run. After all, it is he who shows whether the increase in production capacity leads to a decrease or increase in returns.
It is convenient to analyze the efficiency of resource use in a given period using the long-term average cost function LATC. What is this feature? Suppose that the Moscow government decides to expand the city-owned AZLK plant. With the existing production capacity, cost minimization is achieved with a production volume of 100,000 vehicles per year. This state of affairs is shown by the short-run average cost curve ATC1 corresponding to a given scale of production (Fig. 6.15). Let the introduction of new models, which are planned to be released jointly with Renault, increase the demand for cars. The local design institute proposed two plant expansion projects corresponding to two possible scales of production. Curves ATC2 and ATC3 are short run average cost curves for this large scale of production. When deciding on an option to expand production, the management of the plant, in addition to taking into account the financial possibilities of investment, will take into account two main factors, the amount of demand and the value of the costs with which the required production volume can be produced. It is necessary to choose the scale of production that will ensure the satisfaction of demand at the lowest cost per unit of output.
ILong run average cost curve for a specific project
Here, the points of intersection of neighboring curves of short-term average costs (points A and B in Fig. 6.15) are of fundamental importance. Comparison of the volumes of production corresponding to these points and the magnitude of demand determines the need to increase the scale of production. In our example, if the amount of demand does not exceed 120 thousand cars per year, it is advisable to carry out production on a scale described by the ATC1 curve, i.e., at existing capacities. In this case, the achievable unit costs are minimal. If demand rises to 280,000 vehicles per year, then a plant with a production scale described by the ATC2 curve would be the most suitable. So, it is expedient to carry out the first investment project. If demand exceeds 280,000 vehicles per year, a second investment project will have to be implemented, i.e., to expand the scale of production to the size described by the ATC3 curve.
In the long term, there will be enough time to implement any possible investment project. Therefore, in our example, the long-run average cost curve will consist of successive segments of short-run average cost curves up to the points of their intersection with the next such curve (thick wavy line in Fig. 6.15).
Thus, each point of the LATC long-run cost curve determines the minimum achievable cost per unit of output at a given volume of production, taking into account the possibility of changing the scale of production.
In the limiting case, when a plant of the appropriate scale is built for any amount of demand, i.e., there are infinitely many curves of short-term average costs, the curve of long-term average costs from a wave-like one changes into a smooth line that envelops all curves of short-term average costs. Each point of the LATC curve is a point of contact with a certain ATCn curve (Fig. 6.16).
