As you know, no production can exist without the cost of acquiring production assets. They are called costs. They can be calculated in various ways. Cost analysis today is carried out in relation to the volume of production and by the method of cost estimation.
Considering the process of sale from the position of the seller, the main goal of generating income from the transaction will be the reimbursement of expenses associated with the manufacture of products.
In this regard, allocate opportunity, accounting and economic costs.
Imputed (economic) expenses are economic expenses that, in the opinion of the entrepreneur, he incurred during the production process. These include, but are not limited to:
- company acquired resources;
- domestic assets not included in the market turnover;
- normal profit, which the entrepreneur considers as compensation for risk in the business.
Thus, it is the economic expenses that the entrepreneur undertakes, first of all, to compensate with the help of the price. If for some reason he doesn’t succeed, he leaves the market.
To obtain the factors of production necessary for the enterprise, certain means are necessary. Payments, cash costs associated with the acquisition of resources are called accounting costs. They are always less than economic. This is mainly due to the fact that the accounting costs take into account only the real costs of acquiring production assets from third-party suppliers. These costs are legally formalized, exist in real form, which is the basis for accounting.
The increase in production invariably entails an increase in costs. Since the development of production cannot occur indefinitely, costs are considered one of the main parameters in determining the optimal size of the enterprise.
There are expenses that the organization incurs regardless of the volume of production activities. Such costs are called constant. This category of expenses includes rent for premises, expenses for depreciation of equipment, loans, taxes, remuneration of employees of the company.
There are costs, the size of which depends on the production volume. Such costs are called variables. This category includes expenses for advertising, transportation services, raw materials, remuneration of employees of third-party companies and others. The expansion of production provokes an increase, and the reduction - a decrease in variable costs.
The separation of costs into variables and constants is considered conditional. This classification is used for a short period of time at which a number of production factors are unchanged.
Variable and fixed costs add up to gross costs. This is the total cash costs of the company for the production of a certain volume of goods.
The interdependence and relationship of fixed and variable costs is expressed mathematically as follows:
TC– VC = FC;
FC + VC = TC;
TC– FC = VC.
In this case, FC - fixed and VC - variable costs, and TC - gross costs.
When calculating and plotting expenditures, it should be borne in mind that FCs are equated to a certain constant. In this regard, gross costs will vary in accordance with the behavior of VC. In other words, the total costs of the enterprise in the short term are determined by the law of decreasing marginal productivity.
Average total costs are gross costs per unit of goods. These costs are compared with the price of products, and as a result, an idea of the profitability of the organization. At the same time, average gross costs are reduced against the background of a decrease in variables and constant average costs.