In this article you will learn about costs, cost formulas, and also understand the meaning of their division into different types.
Costs are those financial resources that need to be spent to carry out economic activities. Analyzing costs (cost formulas are given below), we can conclude about the effectiveness of enterprise management of its resources.
Such production costs are divided into several types, depending on how they are affected by changes in production volumes.
Permanent
Under constant costs mean such costs, the value of which is not affected by the volume of production. That is, their value will be the same as when the enterprise is operating in the enhanced mode, fully using production facilities or, conversely, during production downtime.
For example, such expenses may be administrative or some separate items from the sum of overhead expenses (office rent, expenses for maintenance of engineering and technical personnel not related to the production process), employee wages, contributions to insurance funds, license costs, software security and others.
It is worth noting that in fact such costs cannot be called absolutely constant. Still, the volume of production can affect them, albeit not directly, but indirectly. For example, an increase in the volume of products may require an increase in free space in warehouses, additional maintenance of mechanisms that wear out faster.
Often, in literature, economists often use the term "fixed costs of production."
Variables
Unlike fixed costs, variable costs are directly proportional to the volume of output.
This type includes raw materials, materials, other resources that are involved in the production process , electricity and many other types of costs. For example, if you increase the production of wooden boxes by 100 units, you need to purchase an appropriate amount of material from which they will be produced.
The same costs may apply to different types.
Moreover, the same costs can relate to different types, and, accordingly, these will be different costs. The cost formulas by which such costs can be calculated absolutely confirm this fact.
Take, for example, electricity. Light lamps, air conditioners, fans, computers - all this equipment that is installed in the office, works due to electricity. Mechanical equipment, machine tools and other equipment that is involved in the production of goods, products, also consumes electricity.
Moreover, in a financial analysis, electricity is clearly divided and refers to different types of costs. Because in order to correctly forecast future costs, as well as to take into account current expenses , a clear separation of processes depending on the intensity of production is necessary.
Total production costs
The sum of the variable and fixed costs is called “total costs”. The calculation formula is as follows:
Io = Ip + Iper,
Where:
Io - total costs;
Ip - fixed costs;
Iper - variable costs.
Using this indicator, the overall level of costs is determined. Its dynamic analysis allows you to see the processes of optimization, restructuring, reduction or increase in the volume of production and management processes at the enterprise.
Average production costs
By dividing the sum of all costs per unit of output, you can find out the average cost. The calculation formula is as follows:
Is = Io / Op
Where:
Is - average costs;
Op - the volume of production.
This indicator is also called "the total cost of one unit of production." Using this indicator in an economic analysis, you can understand how efficiently an enterprise uses its resources to produce products. In contrast to the general, average costs, the calculation formula of which is given above, show the effectiveness of financing per 1 unit of output.
Marginal cost
To conduct an analysis of the feasibility of changing the quantity of manufactured products, an indicator is used that displays production costs for one additional unit. It is called marginal cost. The calculation formula is as follows:
Ypres = (Io2 - Io1) / (Op2 - Op1),
Where:
Ypres - marginal cost.
This calculation will be very useful if the managerial staff of the enterprise decided to increase production volumes, expansion and other changes in production processes.
So, after you have learned about costs, cost formulas, it becomes clear why in economic analysis clearly divided the costs of the main production, administrative, and general production costs.