Any production is not without costs. Costs (or costs) are the costs of acquiring various factors of production.
Such costs can be considered and analyzed in different ways. During the formation of economic theory, dozens of different classification systems and costing formulas were formed. Since the mid-20th century, two main types of classification have spread:
- on the estimation of production costs;
- in relation to costs to the amount of production.
Costs by the method of cost estimation are divided into economic, accounting and alternative.
Economic costs - this is all the economic costs incurred by the entrepreneur directly in the production process. As a rule, these are expenses for the purchase of external resources (materials for production, tools, etc.), payment for the internal resources of the company, which are not included in the market turnover, and the receipt of normal profit as compensation for business risk.
Accounting costs are payments and other financial expenses incurred by a company for acquiring external factors of production.
Accounting costs can be divided into direct (direct production costs) and indirect (overhead costs, depreciation, payments to the bank, etc.).
Between economic and accounting, there are also alternative costs. In essence, these are the costs of missed opportunities that each entrepreneur calculates independently.
In relation to the costs to the volume of production in a short period of time, they are divided into constant, variable and general.
Fixed - these are costs that are not dependent on the size and volume of production that must be paid in any case. This includes salaries for permanent staff and managers, depreciation, loan and insurance payments, rental of premises and premises, and other expenses associated with the very existence of the company.
Variable costs - this is the amount of costs for variable resources, which can vary depending on the volume of production. This includes material costs, production staff salaries, transportation costs, electricity charges, etc. The larger the volume of production, the higher the variable costs.
Fixed and variable costs in total amount to the total costs of production. If the volume of production is equal to zero, then the total costs consist only of the magnitude of the constant. When production begins, the total costs gradually increase in value according to the addition of variable costs to the total.
To calculate and compare production efficiency, calculate its average costs, which can be briefly defined as the profitability of the production of a certain amount of products, conventionally called the unit of production.
Average costs are expenses that fall on one unit of the product produced. They are also divided into constants, variables, and general.
Fixed average costs are the same fixed costs, but in terms of unit of output. Their peculiarity is that they vary depending on the volume of sales of products, and not on the volume of production.
Average total costs are variable costs recalculated per unit of output. They are directly affected by the principles of diminishing and increasing returns to factors of production. Under the influence of the principle of increasing returns, the total average costs first fall, reaching a certain level, and then begin to grow steadily under the influence of the principle of diminishing returns.
The total average cost is the sum of all costs in terms of unit of production. To count them, you can use two methods:
- divide the amount of total costs by the number of products;
- add the values of average variables and average fixed costs.
The smallest value of average total costs determines the most effective and profitable level in short-term production.