In all the means involved in production (that is, in objects and in its means), as well as in labor, advanced industrial capital is invested, the form of movement of which is production costs. This is the value of those economic resources that an entrepreneur spends to produce his products.
This concept in economic theory is based on the idea that resources are limited, and alternative ways to use them must be sought. The fact is that the choice of a specific method by which the goods will be produced causes the loss of the benefits that can be obtained using the appropriate resources of methods that are best suited from all possible.
In this regard, costs are divided into two groups: they are external (explicit) and internal (hidden).
External (direct costs) are those that go to pay for economic resources - the purchase of raw materials, equipment, transportation services, labor services. Their suppliers are not the owners of the company.
Internal (indirect) costs are those that go to the use of own, unpaid resources. They include those incomes that the entrepreneur did not receive in the most profitable alternative use of his own resources. Internal costs - this is also the minimum fee that an entrepreneur needs in order to continue activities in a particular business area.
The distinction between direct and indirect costs reflects two approaches to understanding the nature of the costs of the company.
1. The accounting approach. It provides for direct costs. They are paid immediately after the invoice or invoice is received. Accounting costs are displayed in the balance sheet of the company.
2. The economic approach. He credits both direct and indirect costs associated with the ability to use resources of choice to production costs. From accounting, economic costs are distinguished by the size of the cost of personal resources.
The cost of lost opportunities (alternative) is the cost that, when compared with the degree of risk, has the highest payment for the chosen production opportunity or the behavior of the company.
This means that economic costs are those that an entrepreneur must make in order to attract resources aimed at alternative use. They reflect the prices of resources at the best of their options.
Depending on the time period during which it is possible to change the economic resources that the company attaches to produce a certain type of product, they distinguish:
- the costs of the company in the long term (that is, in the time period, which is enough to change all the resources that will be attracted);
- the costs of the company in the short-term (that is, in the time period during which at least one type of resource does not change).
The costs of the latter type are also divided into constant, general, average, variable and boundary.
Constant (or conditionally constant) costs occur regardless of the change in production volumes. This is the cost of rent, for the maintenance of administrative staff.
Variable costs are directly related to changes in production volumes. This is the cost of electricity, raw materials, wages for workers.
The total or total costs are the costs of the company for the acquisition and use of all factors of production. They consist of the sum of fixed costs and variables.
Average costs are presented as the average cost of producing a unit of output.
Borderline is the increase in costs that are needed to produce an additional unit of output.
In some cases, it happens that firms incur irreversible costs. They can not be replenished and indicate:
- about the lost opportunities that are associated with erroneous management decisions;
- about the costs that are spent once and for all and are not reimbursed even if the company ceases to exist (for example, advertising costs).