Total production costs in the short term

Regardless of the quality and type of own resources involved in the creation of a product or service, the amount of their use affects the formation of production costs. In the short term, indicators of the cost of resources and factors spent by the company can be either constant or variable.

What is a time interval?

The short-term period is such a time interval in which at the previous production facilities the enterprise is able to increase the volume of production associated with a more intensive and high-quality use of existing equipment.

In the short term, the company uses constant and variable production factors necessary for the release of goods or the provision of services.

Permanent factors:

• amount of equipment used;
• fleet of service vehicles;
• suppliers of raw materials;
• industry presence of manufacturers of similar products.

Variable indicators:

• raw materials, the costs of which depend on the increase in production;
• fuel and electricity consumed from the volume of output;
• payment of piecework workers.

These are indicators of return or efficiency of using production factors. They are usually studied:

• lenders;
• owners;
• by investors.

Costs vary

As already noted, in the short term, the indicators of the factors of production involved are constant or variable. The production costs of the firm in the short run will be constant or variable, respectively.

Fixed costs include those whose value remains unchanged regardless of production volumes.

Indeed, even in the absence of output, for example, a “shutdown" of an enterprise, fixed costs still remain.

These include:

• Rent.
• Overhaul costs.
• Technical equipment of the enterprise: equipment, machine tools, other production facilities.
• Operating costs for the maintenance of the premises.
• The costs of administrative staff.

Variable costs, in contrast to the previous ones, vary depending on the increase (decrease) in the volume of output or services rendered. Moreover, variable costs behave ambiguously: first they decrease in relation to the volume of output, and then the volume in the total expression of variable costs increases. This is explained by the law of diminishing returns of production factors.

That is, at first, when increasing the rate of production, a small amount of variable costs is required, and then, as the volume of production develops and builds up, more and more variable resources are consumed, and variable costs accordingly increase.

These include:

• Costs associated with the purchase of raw materials.
• The cost of electricity.
• The acquisition of auxiliary materials necessary to increase output.
• The cost of the piecework of workers in connection with the growth of productivity.

They are so different

Theoretically and practically, costs or production costs in the short term are classified as fixed and variable. These are important indicators for determining the performance of all factors of the enterprise.

The presence of fixed and variable costs always indicates a short-term period of production in the company.

The total indicator of constant and variable values ​​forms the total gross costs.

We can conclude that total costs are the interaction of fixed and variable costs of the company in the short term.

Important: at zero production volume, total costs are identical to fixed costs and, conversely, when production volumes increase or increase, total production costs in the short term increase in direct proportion to the increase in variable factors.

Unit rates or unit costs

The dynamics of production costs in the short term, their dependence on the increase in production is calculated by comparing the values ​​of fixed and variable costs.

In turn, to more accurately determine the performance of the company, the costs incurred per unit of output are calculated. The obtained indicators are called average, unit or unit production costs in the short term, and briefly - costs.

They are classified by the following types:

1. Average total production costs (ATS) - they can be calculated by adding the components of the average fixed and variable costs, the indicator is used to compare with the level of prices for the products of the company.
2. Average constant (AFC) - with an increase in production volumes, average fixed costs will decrease per unit of output.
3. Average variables (AVC) - production costs of the company spent on the manufacture of a unit of product. This is an indicator of the effectiveness of the use of company resources. It is the indicators of unit variable costs that determine whether the enterprise will expand production, reduce it, or even should leave the market.

Calculation of costs per unit of goods released allows the company to "keep abreast", respond in a timely manner to an increase in the cost indicator, work more efficiently and efficiently develop the price of products.

In the case when the company began to produce additional products, it is necessary to calculate the marginal cost.

Types of production costs in the short term and their interaction with each other

All costs associated with the manufacture of a unit of production in excess of the established output, that is, with the production of additional units of goods (services), are called marginal costs.

Marginal costs are calculated by dividing the indicator of changes in average costs by the indicator of changes in output.

For example, in the manufacture of cosmetics, the variable costs of the company increased from 1,420 to 1,600 rubles per unit of output. At the same time, the volume of products increased from 550 to 600 units of drugs.

Then the specific indicator of marginal cost will be:

MS (marginal cost) = (1600 - 1420): (600 - 550) = 3.6

Production costs and reasons for their change

Marginal costs vary depending on the volume of average (general) indicators of the cost of manufacturing products.

At the same time, various production costs in the short and long term behave differently.

For example, due to the fact that fixed costs in the long term are not subject to change, they are always equal to zero by definition in this time period.

Productivity - Marginal Product

Marginal cost is always marginal variable cost. Therefore, the calculation of average cost indicators in the short term per unit of production is so important. Without it, it is impossible to calculate the marginal costs that a firm will have in case of an increase in production, and also to calculate the limits of savings on a unit of output.

Provided that the marginal (additional) costs are less than the average cost of manufacturing units, production will lower the following costs for each unit of goods. If the costs associated with the production of additional products are above average, then production will show an increase in average costs.

There is a strong connection between marginal costs and marginal product, which is understood as labor productivity: as long as marginal product grows, there will be a decrease in marginal and average variable costs. The marginal and average product take its maximum value at the minimum marginal and variable costs.

The main achievement of the manufacturer will be in excess of the selling price of the product over the marginal cost of its production.

Practical application of the acquired knowledge of costs

Any theory without practical application will remain a toy in the hands of economists.

To avoid this, I will give several examples of the application of the information received in the practical activities of the company.

Calculate the total costs correctly.

Example. The gross revenue of the company in 2017 amounted to 3,200,000 rubles. The net profit of the enterprise was expressed in 400,000 rubles. In order to calculate the costs of the enterprise for 2017, you need to find out the difference between revenue and profit.

The change in production costs in the short term for the company in this case will be expressed as follows:

3200 000 - 400 000 = 2 800 000 (rub.)

The cost of the enterprise in 2017 is 2800 thousand rubles.

The practice of calculating fixed costs

To determine the size of fixed costs, we assume that the total costs of the company that produces eye lenses in March 2018 amounted to 700 thousand rubles. At the same time, variable costs are equal to 300 thousand rubles.

In order to calculate the value of fixed production costs in the short term, it is necessary to subtract variables from the total costs.

Then the March calculation of costs will look like this:

700 - 300 = 400 thousand rubles.

In the same way, you can determine the change in variable costs.

The structure of production costs and its definition

Short-term production costs are costs associated with the production of products or services.

Suppose that in the first half of 2016, the costs incurred at the sanitary ware manufacturing enterprise were as shown in the following table:

Define the cost structure for the selected company.

Structuring involves determining the share of each item of expenditure in the total costs of the organization, taken as one hundred percent. In the proposed embodiment, their total expression is 3 010 000 rubles.

The structure of production costs in the short term is shown in the table.

Costs of the enterprise, calculation procedure

Suppose that the results of the excavator plant for the second quarter of 2018 showed the following data on production costs:

1. Costs for the purchase of raw materials: 2,800,000 rubles.
2. Payment of piecework wages to workers: 220,000 rubles.
3. Management costs: 150,000 rubles.
4. Salary payment in the form of salaries: 315,000 rubles.
5. Rent of additional production facilities: 100,000 rubles.
6. Payment of water supply: 5,000 rubles.
7. Electricity costs: 8 160 rubles.
8. Heating: 6500 rubles.

We calculate the variable and fixed costs of the enterprise in the second quarter of 2018 and the variable average costs per unit of output, if 520 items of special equipment were produced during this period.

For the accuracy of the calculation, it is necessary to determine the indicators in the following sequence:

• Variable costs, for example materials - the more we produce, the more units of output are produced.
• Fixed costs, such as rent, which will be paid regardless of whether the company worked or not, also include the salary of the director and management, and other expenses.
• Group costs by types and their classification features.

Summarize the fixed costs:

• Management salary: 150,000 rubles.
• The cost of salaries of management personnel: 315,000 rubles.
• Rent for additional production facilities: 100,000 rubles.
• Heating costs: 6500 rub.

Total fixed costs at the enterprise in thousand rubles:

150 + 315 + 100 + 6.5 = 571.5 tr or 571,500 rubles.

Summarize the variable costs:

• Expenses for the purchase of raw materials: 2,800,000 rubles.
• Costs of payment of piecework wages to workers: 220,000 rubles.
• Water costs: 5,000 rubles.
• Payment of electricity: 8 160 rubles.

Total variable costs at the enterprise in thousand rubles:

2800 + 220 + 5 + 8.16 = 3 033.16 thousand rubles. or 3 033 160 rubles.

Due to the fact that 520 units of production were produced at the plant during the considered time period, the average variable costs per unit of production will be:

3 033 160: 520 = 5833 rub.

Thus, the calculation of the costs of the enterprise in the short term showed the following characteristics of production:

• Total fixed costs amounted to 624,500 rubles
• Total variable costs amounted to 3 033 160 rubles
• Variable costs per unit of output amounted to 5833 rubles.

A few words about the production function and the impact on costs

As is clear from the previous material, the creative consumption of available resources at the enterprise is involved in the production process. In this regard, there is a certain correlation between the volume of goods produced and the amount used for manufacturing production resources.

It is usually expressed using a production function.

Conventionally, the entire complex of enterprise resources can be represented as general, as it were, averaged labor, financial, and raw materials costs.

Under this condition, the production function is written as follows:

Q = f (L + K + M), where

Q - the maximum indicator of the volume of production produced under the given conditions of technological equipment for given indicators of labor - L, capital - K and expended materials - M.

Therefore, the production function is essentially an expression of the relationship between the given factors of production to determine the interactions and the share of each indicator in the creation of goods or services.

Using various indicators of the factors of the function, you can find the optimal combination of all the indicators involved to achieve maximum production volume. In addition, you can clearly see how the volume of production changes due to changes in the parameters of the function, to determine the capabilities of the firm (enterprise) that have not yet been identified.

Results and conclusions about the nature of costs and their role in production

The production of goods or services requires costs, with each company trying to get the maximum profit from its activities.

To optimize the production process, they reduce their costs, which are essentially the total cost of labor, financial and raw materials for production.

Costs are:

• Explicit - salaries, bank commissions, loans, payment for transport, commission contracts.
• Implicit - the internal costs of the company, defined as the costs of maintaining and allocating resources to the owners, in monetary terms - the shortfall in the company's accounts.
• Permanent - rental payments, utility bills.
• Variable costs can be reduced or increased within one enterprise depending on the volume of production - these are raw materials, materials, hourly wages.
• Irrevocable - usually associated with the start of business or a fundamental change in the business.
• Average costs are calculated per unit of output.
• Marginal cost is a measure of the incremental cost of an additionally issued unit.
• Costs of circulation - costs incurred in order to deliver the goods to the final consumer.

The main task of each company as a participant in the production process is to reduce production costs, optimize production costs and maximize profits.