Perhaps everyone, counting a trifle in his pocket, was wondering - where does the money go? Moreover, this issue is relevant for top management of large manufacturing companies. After all, someone who, and businessmen have always been distinguished by the ability to count money. So, in order not to “fly into the pipe”, it would not hurt to get to know better the concept of “total costs”.
The second edition of the modern economic dictionary gives the following elegantly brief interpretation of the above term: "total costs are a combination of fixed and variable costs."
That is, if for a purely private individual the issue of costs for buying products in a store is extremely important, for firms and companies this problem is somewhat more complicated, since it is necessary to take into account a greater number of factors affecting costs than the store assortment. Cost items such as the cost of raw materials, payroll, taxes, transportation costs, etc.
As can be seen from the definition, it is customary for economists to divide the total costs into fixed and variable. This approach simplifies the task of cost estimation. After all, everything complicated consists of simple. And now let's try to deal with these fixed and variable costs.
If you have extra money, feel free to call it capital and invest in production. Of course, if possible, new and modern equipment is bought that can bring profit to the owner. The amount invested in the equipment will never change, it is then constant. In addition, fixed costs include the costs of using buildings and structures, for overhaul and rent, the cost of administrative expenses is also included here. In the short term, regardless of the volume of production, the magnitude of this type of cost does not change.
The volume of variable costs, on the contrary, directly depends on the volume and dynamics of production. In other words, an increase in the volume of output leads to an increase in the cost of its production and sale. The costs of raw materials, auxiliary materials, electricity and wages are attributed to this type of costs. Naturally, the general variable costs require due attention, since it is impractical to stop the production process, for example, due to the banal absence of bolts, the purchase costs of which were not planned during the design of the process.
The fixed and variable costs combined in the article “total costs” are taken into account when calculating the total cost of the project, which is necessary when compiling project documentation and various business plans. By the way, one almost always needs to be prepared to increase overall costs, especially if we are dealing with a new project that has not been tested before, and, accordingly, we don’t know how profitable it is and will pay back.
An example is government programs for economic development in the regions that have economic need. For example, when exporting raw materials from colonized territories in India, the infrastructure of the whole country was developed. As a result, the effectiveness of this project at the very beginning of its implementation was low. But, in the future, it gave a huge profit.
Total costs can also be taken into account when implementing projects that have political motivation. Although, where politics begins, business ends. During the Soviet Union, for example, a huge number of industries abroad were built, which gave dubious profit for the manufacturer. For example, in China, more than 1,500 production facilities were built with a solid material base for components, etc. in the Union. The total costs of construction and commissioning of these projects are approaching astronomical figures, whether they paid for themselves or not, is still unknown.