Over a long period of work, for various reasons, the conditions of the enterprise, the structure of its resources may change. The scenarios of these changes can also be very diverse, for example, a company can change production volumes, purchase new equipment, and lease free production capacities. All this, to one degree or another, affects production costs in the long run. The scale of the transformations at the enterprise, respectively, determines the variety of types of costs.
There is also a certain regularity in the dependence of the magnitude of the costs on the scale of the ongoing transformations. For example, a constant increase in capacities objectively entails an increase in average total costs. When considering a long-term period, average costs, as a rule, vary depending on the change in scale, while their minimum parameter indicates the optimal value of production volumes. There is a minimum parameter that determines the cost of production of the company. It represents the smallest volume of production at which a company can reduce its average production costs in the long run. Efficiency with this option is determined by the dependence: the more the company produces, the lower the average cost.
Establishing the optimal value of production costs at which the market stability of the company is guaranteed is one of the main tasks of its business. For this situation to be stable, it is necessary to understand the nature of costs, to present their classification structure and to know how the costs of production and the profit of the company are related.
In the simplest terms, production costs are those resources that are spent by an enterprise or firm in the process of creating marketable products. In this context, all production costs in the long term should be considered as payment for the used factors of production. These include depreciation, payment for materials, wages and more. When selling manufactured products, the company receives revenue, from which part goes to compensate for the costs associated with production, the other part of the proceeds goes to what production is organized for.
Modern economist-researchers consider production costs in the long run from the point of view of an entrepreneur, and not in the way that, for example, the Marxist interpretation suggested. According to the modern approach, these costs differ from those associated with the advance of capital, and represent only those costs that arise in the production process of this particular product.
Distribution Costs represent the costs of the sale of goods. They are classified into net (which are directly related to the purchase and sale process) and additional (related to the infrastructure within which the sale of goods is ensured). It should be borne in mind that additional ones, as such, do not increase the value of the value, but can only be repaid after the sale of marketable products from the profits received by the enterprise. Additional, such costs are called because they serve as an objective appendage of net profit. The modern stage in the development of economic science proceeds from the fact that an enterprise or a company expects to receive income from all costs without exception that they may have in the course of their production activities in order to guarantee positive business development and market stability in an increasingly competitive environment.