Additional fixed costs. Microeconomics

In practice, the concept of production costs is usually used. This is due to the difference between the economic and accounting meaning of costs. Indeed, for an accountant, costs are actually spent amounts of money, documented costs, i.e. expenses.

costs as economic term, includes both the actual amount of money spent and the lost profits. By investing money in any investment project, the investor loses the right to use it in another way, for example, to invest in a bank and receive a small, but stable and guaranteed, unless, of course, the bank goes bankrupt, interest.

The best use of available resources is called economic theory opportunity cost or opportunity cost. It is this concept that distinguishes the term "costs" from the term "costs". In other words, costs are costs reduced by the amount of the opportunity cost. Now it becomes obvious why in modern practice it is the costs that form the cost and are used to determine taxation. After all, the opportunity cost is a rather subjective category and cannot reduce taxable income. Therefore, the accountant deals with costs.

However, for economic analysis opportunity costs are of fundamental importance. It is necessary to determine the lost profit, and “is the game worth the candle?” It is precisely on the basis of the concept of opportunity costs that a person who is able to create his own business and work "for himself" may prefer a less complex and nervous type of activity. It is on the basis of the concept of opportunity cost that one can draw a conclusion about the expediency or inexpediency of making certain decisions. It is no coincidence that when determining the manufacturer, contractor and subcontractor, a decision is often made to declare open competition, and when evaluating investment projects in conditions where there are several projects, and some of them need to be postponed for a certain time, the lost profit coefficient is calculated.

Fixed and variable costs

All costs, minus alternative costs, are classified according to the criterion of dependence or independence from the volume of production.

Fixed costs are costs that do not depend on the volume of output. They are designated FC.

Fixed costs include the cost of paying technical staff, premises security, product advertising, heating, etc. Fixed costs also include depreciation charges (for the restoration of fixed capital). To define the concept of depreciation, it is necessary to classify the assets of an enterprise into fixed and working capital.

Fixed capital is capital that transfers its value to the finished product in parts (the cost of the product includes only a small part of the cost of the equipment with which the production of this product is carried out), and value expression means of labor are called basic production assets. The concept of fixed assets is broader, since they also include non-production assets that may be on the balance sheet of an enterprise, but their value is gradually lost (for example, a stadium).

The capital that transfers its value to the finished product during one turnover, spent on the purchase of raw materials and materials for each production cycle, is called working capital. Depreciation is the process of transferring the value of fixed assets to finished products in parts. In other words, equipment sooner or later wears out or becomes obsolete. Accordingly, it loses its usefulness. This also happens due to natural causes (use, temperature fluctuations, structural wear, etc.).

Depreciation deductions are made on a monthly basis based on the depreciation rates established by law and the book value of fixed assets. Depreciation rate - the ratio of the amount of annual depreciation deductions to the cost of fixed production assets, expressed as a percentage. The state establishes various depreciation rates for certain groups of fixed production assets.

There are the following depreciation methods:

Linear (equal deductions over the entire life of the depreciable property);

Decreasing balance method (depreciation is charged from the entire amount only in the first year of equipment service, then accrual is made only from the untransferred (remaining) part of the cost);

Cumulative, by the sum of the numbers of years beneficial use(a cumulative number is determined representing the sum of the numbers of years of useful life of the equipment, for example, if the equipment is depreciated over 6 years, then the cumulative number will be 6+5+4+3+2+1=21; then the price of the equipment is multiplied by the number of years of useful life and the resulting product is divided by the cumulative number, in our example, for the first year, depreciation deductions for equipment costing 100,000 rubles will be calculated as 100,000x6/21, depreciation charges for the third year will be 100,000x4/21, respectively);

Proportional, proportional to output (determined by depreciation per unit of output, which is then multiplied by the volume of production).

With the rapid development of new technologies, the state can apply accelerated depreciation, which allows for more frequent replacement of equipment in enterprises. In addition, accelerated depreciation can be made as part of state support small business entities (depreciation deductions are not subject to income tax).

Variable costs are costs that are directly related to the volume of production. They are designated VC. Variable costs include the cost of raw materials and materials, piecework wages workers (it is calculated based on the volume of products produced by the employee), part of the cost of electricity (since electricity consumption depends on the intensity of the equipment) and other costs that depend on the volume of products produced.

The sum of fixed and variable costs is the gross cost. Sometimes they are called complete or general. They are referred to as TS. It is not difficult to imagine their dynamics. It is enough to raise the variable cost curve by the amount of fixed costs, as shown in Fig. one.

Rice. 1. Production costs.

The ordinate shows fixed, variable and gross costs, the abscissa shows the volume of output.

When analyzing gross costs, it is necessary to pay attention Special attention on their structure and its change. Comparison of gross costs with gross income is called gross performance analysis. However, for a more detailed analysis, it is necessary to determine the relationship between costs and output. For this, the concept of average costs is introduced.

Average costs and their dynamics

Average costs are the costs of producing and selling a unit of output.

Average total cost (average total cost, sometimes referred to simply as average cost) is determined by dividing total cost by the amount of output produced. They are designated ATS or simply AC.

Average variable costs are determined by dividing the variable costs by the amount of output produced.

They are designated AVC.

Medium fixed costs determined by dividing fixed costs by the quantity of goods produced.

They are designated AFC.

Naturally, average total cost is the sum of average variable and average fixed costs.

Initially, the average cost is high, since starting a new production requires certain fixed costs, which are high per unit of output initially.

Gradually, average costs decrease. This is due to the increase in output. Accordingly, with an increase in the volume of production per unit of output, there are less and less fixed costs. In addition, the growth in production makes it possible to purchase necessary materials and tools in large quantities, and this, as you know, is much cheaper.

However, after a while, variable costs begin to rise. This is due to the diminishing marginal productivity of factors of production. The growth of variable costs causes the beginning of the growth of average costs.

However, the minimum average cost does not mean the maximum profit. At the same time, the analysis of the dynamics of average costs is of fundamental importance. It allows:

Determine the volume of production corresponding to the minimum cost per unit of output;

Compare the cost per unit of output with the price of a unit of output in the consumer market.

On fig. Figure 2 shows a variant of the so-called marginal firm: the price line touches the average cost curve at point B.

Rice. 2. Point of zero profit (B).

The point where the price line touches the average cost curve is usually called the zero profit point. The firm is able to cover the minimum costs per unit of output, but the possibilities for the development of the enterprise are extremely limited. From the point of view of economic theory, the firm does not care whether to stay in the industry, or leave it. This is due to the fact that at this point the owner of the enterprise receives a normal reward for the use of his own resources. From the point of view of economic theory, the normal profit, considered as the return on capital at the best alternative use of capital, is part of the costs. Therefore, the average cost curve also includes opportunity costs (it is easy to guess that under conditions of pure competition in the long run, entrepreneurs receive only the so-called normal profit, and there is no economic profit). The analysis of average costs must be supplemented by the study of marginal costs.

The Concept of Marginal Cost and Marginal Revenue

Average costs characterize the costs per unit of output, gross costs characterize the costs as a whole, and marginal cost provide an opportunity to explore the dynamics of gross costs, try to anticipate negative trends in the future and ultimately draw a conclusion about the most optimal variant of the production program.

Marginal cost is the incremental cost incurred by producing an additional unit of output. In other words, marginal cost is the increase in gross cost per unit increase in production. Mathematically, we can define marginal cost as follows:

MC = ∆TC / ∆Q.

Marginal cost shows whether the production of an additional unit of output makes a profit or not. Consider the dynamics of marginal costs.

Initially, marginal costs are reduced, remaining below average. This is due to the reduction in unit costs due to the positive economies of scale. Then, just like averages, marginal costs begin to rise.

Obviously, the production of an additional unit of output also gives an increase in total income. To determine the increase in income due to an increase in production, the concept is used marginal income or marginal revenue.

Marginal revenue (MR) is the additional revenue generated by increasing production by one unit:

MR = ∆R / ∆Q,

where ΔR is the change in the company's income.

By subtracting marginal cost from marginal revenue, we obtain marginal profit (it can also be negative). It is obvious that the entrepreneur will increase the volume of production as long as he remains able to receive marginal profit, despite its decrease due to the law of diminishing returns.

Source - Golikov M.N. Microeconomics: teaching aid for universities. - Pskov: Publishing House of PSPU, 2005, 104 p.

53. Fixed and variable costs

fixed costs- Costs that do not change depending on the volume of production. The source of fixed costs (overhead) are the costs of fixed resources.

The latter remain unchanged throughout short term Therefore, fixed costs do not depend on the volume of output. The plant may be idle because does not find a market for its products; mine - do not work due to workers' strikes.

But both the plant and the mine continue to incur fixed costs: they must pay interest on loans, insurance premiums, property taxes, pay the salaries of cleaners and watchmen; make utility payments.

The absence of a connection between output and fixed costs does not reduce the influence of the latter on the production process.

To understand this, it is enough to list the types of fixed costs.

These include many costs that determine the technological level of production. These are the costs of fixed capital in the form of depreciation, rental payments; expenditure on R&D and other know-how; payments for the use of patents.

Fixed costs are some costs of "human capital", including the payment of the "backbone" of the staff: key managers, accountants, or even skilled craftsmen - workers of rare specialties. The cost of training and advanced training of employees can also be considered fixed costs.

Fixed costs do not depend on the volume of production.

source variable costs are the costs of variable resources. The main share of these costs is associated with non-use of working capital.

They include the cost of purchasing raw materials, materials, components and semi-finished products, the payment of wages to production workers. The nature of variable costs is also transport costs, value added tax, various payments, if the contract establishes their amount in the form of fixed costs.

As you know, in the short run, changes in output are associated with a decrease or increase in the cost of variable resources.

Therefore, variable costs rise with an increase in output.

Moreover, the nature of this growth depends on the return on the variable resource (more specifically, on whether it is increasing, constant or decreasing).

The sum of fixed and variable costs forms the gross (total) total costs in the short term:

TC = TFC + TVC

If the company does not produce products, then the gross total cost is equal to the amount of fixed costs. When increasing the volume of production, gross costs increase by the amount of variable costs, depending on the volume of production.

(Materials are given on the basis of: E.A. Tatarnikov, N.A. Bogatyreva, O.Yu. Butova. Microeconomics. Answers to exam questions: Tutorial for universities. - M.: Exam Publishing House, 2005. ISBN 5-472-00856-5)

Costs are those costs incurred by a firm to create a service or product. As a result of adding up all the costs, the cost of the goods is obtained, that is, the price of the goods is formed below which it is unprofitable to sell products on the market.

Fixed and variable costs of production

When analyzing costs, one can distinguish their different classification depending on the method of consideration. For example, fixed and variable costs of production. The first type of costs includes costs that are incurred at any stage of production and in any case, regardless of the volume of products produced. Even if the enterprise temporarily suspended production, fixed costs need to be implemented. Fixed costs of production include: rent for premises, depreciation, administrative and management expenses, maintenance of equipment and security of the premises, the cost of heating and electricity, and more. If the company has received a loan, then the payment of interest is also a fixed cost.

Fixed costs of production are associated with the operation of the company, regardless of the quantity of goods produced. The ratio of the volume of manufactured goods to the volume of fixed costs is called average fixed costs. Average fixed costs show the cost per unit of output. As we said above, the amount of fixed costs does not depend on the quantity of goods produced, so average fixed costs decrease as the quantity of goods increases. With an increase in production, the amount of costs is allocated to large quantity products. Often in practice, fixed costs are called overhead costs.

Variable production costs include the cost of purchasing raw materials, energy costs, transport, fuel and lubricants, wages of production workers, etc. Variable production costs depend on the quantity of output and on the volume of production.

The combination of fixed (FC) and variable (VC) costs is called total costs (TC), which form the cost of production. They are calculated by the formula: TC = FC + VC. By general rule costs increase as production expands.

Unit costs can be average fixed (AFC), average variable (AVC) or average total (ATC). Calculated as follows:

1. AFC = fixed costs / volume of goods produced

2. AVC = Variable Costs / Goods Output

3. ATC \u003d total costs (or average fixed + average variables) / volume of goods produced

At the initial stages of production, the maximum costs, as the volumes increase, the average costs decrease, reach the minimum level, and then begin to grow.

If it is required to determine the amount of costs required to produce an additional unit of output, then marginal production costs are calculated, which show the costs of increasing production by the last unit of output.

Fixed Costs of Production: Examples

Fixed costs are those costs that remain unchanged regardless of the volume of products produced, even when these costs are idle. When summing the constants and variable costs total costs are obtained, which form the cost of production.

Examples of Fixed Costs:

• Rental payments.
• Property taxes.
• Salary of office staff and others.

But fixed costs are such only for short-term analysis, since over a long period costs may change due to an increase or decrease in production, changes in taxes and rents, and so on.

Lecture:

Fixed and variable costs

success entrepreneurial activity(business) is determined by the amount of profit, the calculation of which is made according to the formula: revenue - costs = profit .

What expenses should the manufacturer incur in order to create a product or service? It:

• expenses for raw materials and supplies;
• expenses for utilities, transport and other services;
• payment of taxes, insurance premiums, interest on a loan;
• payment of salaries to employees;
• depreciation deductions.

Costs are otherwise known as production costs. They are fixed and variable. The fixed and variable costs of the firm for the production and sale of a unit of goods constitute its cost price which is expressed in monetary terms.

fixed costs- these are costs that do not depend on the volume of output, that is, costs that the manufacturer is forced to make even if his income does not amount to a ruble.

These include:

• rent payments;
• taxes;
• interest on loans;
• insurance payments;
• utility bills;
• salaries of management personnel (administrators, salaries of managers, accountants, etc.);
• depreciation deductions (expenses for the replacement or repair of worn-out equipment).

variable costs These are costs, the value of which depends on the volume of products produced.

Among them:

• expenses for raw materials and supplies;
• fuel costs;
• payment for electricity;
• piecework wages for hired workers;
• transportation costs;
• shipping and packaging costs.

External and internal costs

Fixed costs (TFC), variable costs (TVC) and their schedules. Determination of total costs

In the short run, some resources remain unchanged, while others change to increase or decrease total output.

In accordance with this, the economic costs of the short-term period are divided into fixed and variable costs. In the long run, this division loses its meaning, since all costs can change (i.e., they are variable).

Fixed Costs (FC) are costs that do not depend in the short run on how much the firm produces. They represent the costs of its fixed factors of production.

Fixed costs include:

• - payment of interest on bank loans;
• - depreciation deductions;
• - payment of interest on bonds;
• - salaries of management personnel;
• - rent;
• - insurance payments;

Variable Costs (VC) These are costs that depend on the firm's output. They represent the costs of the firm's variable factors of production.

Variable costs include:

• - wage;
• - fare;
• - electricity costs;
• - the cost of raw materials and materials.

From the graph we see that the wavy line depicting variable costs rises with an increase in production volume.

This means that as production increases, variable costs increase:

initially they rise in proportion to the change in output (until point A is reached)

then variable cost savings are achieved at mass production, and their growth rate decreases (before reaching point B)

the third period, reflecting the change in variable costs (moving to the right from point B), is characterized by an increase in variable costs due to a violation optimal sizes enterprises. This is possible with an increase in transportation costs due to the increased volumes of imported raw materials, volumes finished products to be shipped to the warehouse.

General (gross) costs (TC) are all costs of this moment the time it takes to produce a product. TC = FC + VC

Formation of the curve of average long-term costs, its schedule

The scale effect is a phenomenon of the long run, when all resources are variable. This phenomenon should not be confused with the known law of diminishing returns. The latter is a phenomenon of an extremely short period, when fixed and variable resources interact.

At constant prices for resources, economies of scale determine the dynamics of costs in the long run. After all, it is he who shows whether the increase in production capacity leads to a decrease or increase in returns.

It is convenient to analyze the efficiency of resource use in a given period using the long-term average cost function LATC. What is this feature? Suppose that the Moscow government decides to expand the city-owned AZLK plant. With the available production capacity cost minimization is achieved with a production volume of 100,000 vehicles per year. This state of affairs is shown by the short-run average cost curve ATC1 corresponding to a given scale of production (Fig. 6.15). Suppose that the introduction of new models, which are scheduled to be released jointly with Renault, increased the demand for cars. The local design institute proposed two plant expansion projects corresponding to two possible scales of production. Curves ATC2 and ATC3 are short run average cost curves for this large scale of production. When deciding on the option to expand production, the plant management, in addition to taking into account financial opportunities investment, will take into account two main factors, the magnitude of demand and the value of the costs with which it is possible to produce the required volume of production. It is necessary to choose the scale of production that will ensure the satisfaction of demand at the lowest cost per unit of output.

ILong run average cost curve for a specific project

Here, the points of intersection of neighboring curves of short-term average costs (points A and B in Fig. 6.15) are of fundamental importance. Comparison of the volumes of production corresponding to these points and the magnitude of demand determines the need to increase the scale of production. In our example, if the amount of demand does not exceed 120 thousand cars per year, it is advisable to carry out production on a scale described by the ATC1 curve, i.e., at existing capacities. In this case, the achievable unit costs are minimal. If demand rises to 280,000 vehicles per year, then a plant with a production scale described by the ATC2 curve would be the most suitable. So, it is expedient to carry out the first investment project. If demand exceeds 280,000 vehicles per year, a second investment project will have to be implemented, i.e., to expand the production scale to the size described by the ATC3 curve.

In the long term, there will be enough time to implement any possible investment project. Therefore, in our example, the long-run average cost curve will consist of successive segments of short-run average cost curves up to the points of their intersection with the next such curve (thick wavy line in Fig. 6.15).

Thus, each point of the LATC long-run cost curve determines the minimum achievable cost per unit of output at a given volume of production, taking into account the possibility of changing the scale of production.

In the limiting case, when a plant of the appropriate scale is built for any amount of demand, i.e., there are infinitely many curves of short-term average costs, the curve of long-term average costs from a wave-like one changes into a smooth line that envelops all curves of short-term average costs. Each point of the LATC curve is a point of contact with a certain ATCn curve (Fig. 6.16).