Let's talk about the enterprise's fixed costs: what economic meaning does this indicator have, how to use and analyze it.

Fixed costs. Definition

Fixed costs(EnglishFixedcostF.C.TFC ortotalfixedcost) is a class of enterprise costs that are not related (do not depend) on the volume of production and sales. At each moment of time they are constant, regardless of the nature of the activity. Fixed costs, together with variables, which are the opposite of constant, constitute the total costs of the enterprise.

Formula for calculating fixed costs/expenses

The table below shows possible fixed costs. In order to better understand fixed costs, let's compare them with each other.

Fixed costs= Salary costs + Premises rental + Depreciation + Property taxes + Advertising;

Variable costs = Costs of raw materials + Materials + Electricity + Fuel + Bonus part of salary;

Total costs= Fixed costs + Variable costs.

It should be noted that fixed costs are not always constant, because an enterprise, when developing its capacities, can increase production space, the number of personnel, etc. As a result, fixed costs will also change, which is why management accounting theorists call them ( conditionally fixed costs). Similarly for variable costs – conditionally variable costs.

An example of calculating fixed costs at an enterprise inExcel

Let us clearly show the differences between fixed and variable costs. To do this, in Excel, fill in the columns with “production volume”, “fixed costs”, “variable costs” and “total costs”.

Below is a graph comparing these costs with each other. As we see, with an increase in production volume, the constants do not change over time, but the variables grow.

Fixed costs do not change only in the short term. In the long term, any costs become variable, often due to the impact of external economic factors.

Two methods for calculating costs in an enterprise

When producing products, all costs can be divided into two groups using two methods:

• fixed and variable costs;
• indirect and direct costs.

It should be remembered that the costs of the enterprise are the same, only they can be analyzed using different methods. In practice, fixed costs strongly overlap with such concepts as indirect costs or overhead costs. As a rule, the first method of cost analysis is used in management accounting, and the second in accounting.

Fixed costs and the break-even point of the enterprise

Variable costs are part of the break-even point model. As we determined earlier, fixed costs do not depend on the volume of production/sales, and with an increase in output, the enterprise will reach a state where the profit from products sold will cover variable and fixed costs. This state is called the break-even point or the critical point when the enterprise reaches self-sufficiency. This point is calculated in order to predict and analyze the following indicators:

• at what critical volume of production and sales will the enterprise be competitive and profitable;
• what volume of sales must be made in order to create a zone of financial security for the enterprise;

Marginal profit (income) at the break-even point coincides with the enterprise's fixed costs. Domestic economists often use the term gross income instead of marginal profit. The more the marginal profit covers fixed costs, the higher the profitability of the enterprise. You can study the break-even point in more detail in the article ““.

Fixed costs in the balance sheet of the enterprise

Since the concepts of fixed and variable costs of an enterprise relate to management accounting, there are no lines in the balance sheet with such names. In accounting (and tax accounting) the concepts of indirect and direct costs are used.

In general, fixed costs include balance sheet lines:

• Cost of goods sold – 2120;
• Selling expenses – 2210;
• Managerial (general business) – 2220.

The figure below shows the balance sheet of Surgutneftekhim OJSC; as we see, fixed costs change every year. The fixed cost model is a purely economic model and can be used in the short term when revenue and production volume change linearly and naturally.

Let's take another example - OJSC ALROSA and look at the dynamics of changes in semi-fixed costs. The figure below shows the pattern of cost changes from 2001 to 2010. You can see that costs have not been constant over 10 years. The most consistent cost throughout the period was selling expenses. Other expenses changed one way or another.

Summary

Fixed costs are costs that do not change depending on the volume of production of the enterprise. This type of costs is used in management accounting to calculate total costs and determine the break-even level of the enterprise. Since an enterprise operates in a constantly changing external environment, fixed costs also change in the long run and therefore in practice they are more often called semi-fixed costs.

Let's consider the variable costs of an enterprise, what they include, how they are calculated and determined in practice, consider methods for analyzing the variable costs of an enterprise, the effect of changing variable costs at different volumes of production and their economic meaning. In order to easily understand all this, an example of variable cost analysis based on the break-even point model is analyzed at the end.

Variable costs of the enterprise. Definition and their economic meaning

Variable costs of the enterprise (EnglishVariableCost,V.C.) are the costs of the enterprise/company, which vary depending on the volume of production/sales. All costs of an enterprise can be divided into two types: variable and fixed. Their main difference is that some change with increasing production volume, while others do not. If the company's production activities cease, then variable costs disappear and become equal to zero.

Variable costs include:

• The cost of raw materials, materials, fuel, electricity and other resources involved in production activities.
• Cost of manufactured products.
• Wages of working personnel (part of the salary depends on the standards met).
• Percentages on sales to sales managers and other bonuses. Interest paid to outsourcing companies.
• Taxes that have a tax base based on the size of sales and sales: excise taxes, VAT, unified tax on premiums, tax according to the simplified tax system.

What is the purpose of calculating the variable costs of an enterprise?

Behind any economic indicator, coefficient and concept one should see their economic meaning and the purpose of their use. If we talk about the economic goals of any enterprise/company, then there are only two of them: either increasing income or reducing costs. If we summarize these two goals into one indicator, we get the profitability/profitability of the enterprise. The higher the profitability/profitability of an enterprise, the greater its financial reliability, the greater the opportunity to attract additional borrowed capital, expand its production and technical capacities, increase intellectual capital, increase its value in the market and investment attractiveness.

The classification of enterprise costs into fixed and variable is used for management accounting, and not for accounting. As a result, there is no such item as “variable costs” in the balance sheet.

Determining the size of variable costs in the overall structure of all enterprise costs allows you to analyze and consider various management strategies for increasing the profitability of the enterprise.

Amendments to the definition of variable costs

When we introduced the definition of variable costs/costs, we were based on a model of linear dependence of variable costs and production volume. In practice, variable costs often do not always depend on the size of sales and output, so they are called conditionally variable (for example, the introduction of automation of part of the production functions and, as a result, a reduction in wages for the production rate of production personnel).

The situation is similar with fixed costs; in reality, they are also semi-fixed in nature and can change with production growth (increasing rent for production premises, changes in the number of personnel and a consequence of the volume of wages. You can read more about fixed costs in detail in my article: "".

Classification of enterprise variable costs

In order to better understand how to understand what variable costs are, consider the classification of variable costs according to various criteria:

Depending on the size of sales and production:

• Proportional costs. Elasticity coefficient =1. Variable costs increase in direct proportion to the increase in production volume. For example, production volume increased by 30% and costs also increased by 30%.
• Progressive costs (analogous to progressive-variable costs). Elasticity coefficient >1. Variable costs have a high sensitivity to change depending on the size of output. That is, variable costs increase relatively more with production volume. For example, production volume increased by 30% and costs by 50%.
• Degressive costs (analogous to regressive-variable costs). Elasticity coefficient< 1. При увеличении роста производства переменные издержки предприятия уменьшаются. Данный эффект получил название – «эффект масштаба» или «эффект массового производства». Так, например, объем производства вырос на 30%, а при этом размер переменных издержек увеличился только на 15%.

The table shows an example of changes in production volume and the size of variable costs for their various types.

According to statistical indicators, there are:

• Total variable costs ( EnglishTotalVariableCost,TVC) - include the totality of all variable costs of the enterprise for the entire range of products.
• Average variable costs (AVC, AverageVariableCost) – average variable costs per unit of product or group of goods.

According to the method of financial accounting and attribution to the cost of manufactured products:

• Variable direct costs are costs that can be attributed to the cost of goods manufactured. Everything is simple here, these are the costs of materials, fuel, energy, wages, etc.
• Variable indirect costs are costs that depend on the volume of production and it is difficult to assess their contribution to the cost of production. For example, during the industrial separation of milk into skim milk and cream. Determining the amount of costs in the cost price of skim milk and cream is problematic.

In relation to the production process:

• Production variable costs - costs of raw materials, supplies, fuel, energy, wages of workers, etc.
• Non-production variable costs are costs not directly related to production: commercial and administrative expenses, for example: transportation costs, commission to an intermediary/agent.

Formula for calculating variable costs/expenses

As a result, you can write a formula for calculating variable costs:

Variable costs = Costs of raw materials + Materials + Electricity + Fuel + Bonus part of salary + Interest on sales to agents;

Variable costs= Marginal (gross) profit – Fixed costs;

The combination of variable and fixed costs and constants constitute the total costs of the enterprise.

Total costs= Fixed costs + Variable costs.

The figure shows the graphical relationship between enterprise costs.

How to reduce variable costs?

One strategy for reducing variable costs is to use “economies of scale.” With an increase in production volume and the transition from serial to mass production, economies of scale appear.

Economies of scale graph shows that as production volume increases, a turning point is reached when the relationship between costs and production volume becomes nonlinear.

At the same time, the rate of change in variable costs is lower than the growth of production/sales. Let's consider the reasons for the appearance of the “production scale effect”:

1. Reducing management personnel costs.
2. Use of R&D in production. An increase in output and sales leads to the possibility of carrying out expensive research work to improve production technology.
3. Narrow product specialization. Focusing the entire production complex on a number of tasks can improve their quality and reduce the amount of defects.
4. Production of products similar in the technological chain, additional capacity utilization.

Variable costs and break-even point. Example calculation in Excel

Let's consider the break-even point model and the role of variable costs. The figure below shows the relationship between changes in production volume and the size of variable, fixed and total costs. Variable costs are included in total costs and directly determine the break-even point. More

When the enterprise reaches a certain volume of production, an equilibrium point occurs at which the size of profits and losses coincides, net profit is equal to zero, and marginal profit is equal to fixed costs. Such a point is called break-even point, and it shows the minimum critical level of production at which the enterprise is profitable. In the figure and calculation table presented below, 8 units are achieved by producing and selling. products.

The enterprise's task is to create security zone and ensure a level of sales and production that would ensure the maximum distance from the break-even point. The further an enterprise is from the break-even point, the higher the level of its financial stability, competitiveness and profitability.

Let's look at an example of what happens to the break-even point when variable costs increase. The table below shows an example of changes in all indicators of income and costs of an enterprise.

As variable costs increase, the break-even point shifts. The figure below shows a graph for achieving the break-even point in a situation where the variable costs of producing one unit of steel are not 50 rubles, but 60 rubles. As we can see, the break-even point became equal to 16 units of sales/sales or 960 rubles. income.

This model, as a rule, operates with linear relationships between production volume and income/costs. In real practice, dependencies are often nonlinear. This arises due to the fact that production/sales volume is influenced by: technology, seasonality of demand, influence of competitors, macroeconomic indicators, taxes, subsidies, economies of scale, etc. To ensure the accuracy of the model, it should be used in the short term for products with stable demand (consumption).

Summary

In this article, we examined various aspects of variable costs/costs of an enterprise, what forms them, what types of them exist, how changes in variable costs and changes in the break-even point are related. Variable costs are the most important indicator of an enterprise in management accounting, for creating planned tasks for departments and managers to find ways to reduce their weight in total costs. To reduce variable costs, production specialization can be increased; expand the range of products using the same production facilities; increase the share of research and production developments to improve efficiency and quality of output.

Certain costs, which do not depend at all on changes in production volume. They can only depend on time. At the same time, the variables and permanent costs in sum determine the size of the total costs.

You can also have fixed costs if you derive this indicator from the formula that determines: Revenue = Fixed costs - Variable (total) costs. That is, based on this formula, we get: Fixed costs = Revenue + Variable (total) costs.

Sources:

• Average variable costs

Costs play a big role in business development, because they directly affect profits. In modern economics, there are two types: fixed and variable costs. Their optimization allows you to increase the efficiency of the enterprise.

To begin with, it is necessary to define the short-term and long-term periods. This will allow you to better understand the essence of the issue. In the short run, factors of production can be constant or variable. In the long run, they will only be variables. Let's say the building is . In the short term, it will not change in any way: the company will use it to, for example, place machines. However, in the long term, the company can buy a more suitable building.

Fixed costs

Fixed costs are those that do not change in the short run even if production increases or decreases. Let's say the same building. No matter how many goods are produced, the rent will always be the same. You can work even the whole day, the monthly payment will still remain unchanged.

To optimize fixed costs, a comprehensive analysis is required. Depending on the specific unit, solutions may vary significantly. If we are talking about rent for a building, then you can try to reduce the price for accommodation, occupy only part of the building so as not to pay for everything, etc.

Variable costs

It is not difficult to guess that variables are costs that can change depending on the decrease or increase in production volumes in any period. For example, to make one chair you need to spend half a tree. Accordingly, to make 100 chairs, you need to spend 50 trees.

It is much easier to optimize variable costs than fixed ones. Most often, it is simply necessary to reduce the cost of production. This can be done, for example, by using cheaper materials, upgrading technology or optimizing the location of workplaces. Let’s say that instead of oak, which costs 10 rubles, we use poplar, which costs 5 rubles. Now, to produce 100 chairs you need to spend not 50 rubles, but 25.

Other indicators

There are also a number of secondary indicators. Total costs are a combination of variable and fixed costs. Let’s say that for one day of renting a building, an entrepreneur pays 100 rubles and produces 200 chairs, the cost of which is 5 rubles. Total costs will be equal to 100+(200*5)=1100 rubles per day.

Beyond that, there are plenty of averages. For example, average fixed costs (how much you need to pay for one unit of production).

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10.11 Types of costs

When we looked at the periods of production of a firm, we said that in the short run the firm can change not all the factors of production used, while in the long run all factors are variable.

It is precisely these differences in the possibility of changing the volume of resources when changing production volumes that forced economists to divide all types of costs into two categories:

1. fixed costs;
2. variable costs.

Fixed costs(FC, fixed cost) are those costs that cannot be changed in the short term, and therefore they remain the same with small changes in the volume of production of goods or services. Fixed costs include, for example, rent for premises, costs associated with maintaining equipment, payments to repay previously received loans, as well as all kinds of administrative and other overhead costs. Let's say it is impossible to build a new oil refining plant within a month. Therefore, if next month an oil company plans to produce 5% more gasoline, then this is only possible on existing production facilities and with existing equipment. In this case, an increase in output by 5% will not lead to an increase in the costs of servicing equipment and maintaining production facilities. These costs will remain constant. Only the amounts of wages paid, as well as the costs of materials and electricity (variable costs) will change.

The fixed cost graph is a horizontal line.

Average fixed costs (AFC, average fixed cost) are fixed costs per unit of output.

Variable costs(VC, variable cost) are those costs that can be changed in the short term, and therefore they grow (decrease) with any increase (decrease) in production volumes. This category includes costs for materials, energy, components, and wages.

Variable costs show the following dynamics depending on the volume of production: up to a certain point they increase at a killing pace, then they begin to increase at an increasing pace.

The variable cost schedule looks like this:

Average variable costs (AVC, average variable cost) are variable costs per unit of output.

The standard Average Variable Cost graph looks like a parabola.

The sum of fixed costs and variable costs is total costs (TC, total cost)

TC = VC + FC

Average total cost (AC, average cost) is the total cost per unit of production.

Also, average total costs are equal to the sum of average fixed and average variable costs.

AC = AFC + AVC

AC graph looks like a parabola

Marginal costs occupy a special place in economic analysis. Marginal cost is important because economic decisions typically involve marginal analysis of available alternatives.

Marginal cost (MC, marginal cost) is the increment in total costs when producing an additional unit of output.

Since fixed costs do not affect the increment in total costs, marginal costs are also an increment in variable costs when producing an additional unit of output.

As we have already said, formulas with derivatives in economic problems are used when smooth functions are given, from which it is possible to calculate derivatives. When we are given individual points (discrete case), then we should use formulas with increment ratios.

The marginal cost graph is also a parabola.

Let's plot the marginal cost graph together with the graphs of average variables and average total costs:

The above graph shows that AC always exceeds AVC since AC = AVC + AFC, but the distance between them decreases as Q increases (since AFC is a monotonically decreasing function).

The graph also shows that the MC graph intersects the AVC and AC graphs at their minimum points. To justify why this is so, it is enough to recall the relationship between average and maximum values ​​already familiar to us (from the “Products” section): when the maximum value is below the average, then the average value decreases with increasing volume. When the marginal value is higher than the average value, the average value increases with increasing volume. Thus, when the marginal value crosses the average value from bottom to top, the average value reaches a minimum.

Now let’s try to correlate the graphs of general, average, and maximum values:

These graphs show the following patterns.

Production costs are the costs of purchasing economic resources consumed in the process of producing certain goods.

Any production of goods and services, as is known, is associated with the use of labor, capital and natural resources, which are factors of production, the value of which is determined by production costs.

Due to limited resources, the problem arises of how best to use them among all rejected alternatives.

Opportunity costs are the costs of producing goods, determined by the cost of the best lost opportunity to use production resources, ensuring maximum profit. The opportunity costs of a business are called economic costs. These costs must be distinguished from accounting costs.

Accounting costs differ from economic costs in that they do not include the cost of factors of production that are owned by the owners of firms. Accounting costs are less than economic costs by the amount of implicit earnings of the entrepreneur, his wife, implicit land rent and implicit interest on the owner’s equity capital. In other words, accounting costs are equal to economic costs minus all implicit costs.

The options for classifying production costs are varied. Let's start by distinguishing between explicit and implicit costs.

Explicit costs are opportunity costs that take the form of cash payments to the owners of production resources and semi-finished products. They are determined by the amount of company expenses to pay for purchased resources (raw materials, materials, fuel, labor, etc.).

Implicit (imputed) costs are the opportunity costs of using resources that belong to the firm and take the form of lost income from the use of resources that are the property of the firm. They are determined by the cost of resources owned by a given company.

The classification of production costs can be carried out taking into account the mobility of production factors. Fixed, variable and total costs are distinguished.

Fixed costs (FC) are costs whose value in the short run does not change depending on changes in production volume. These are sometimes called "overhead" or "sunk costs". Fixed costs include the cost of maintaining production buildings, purchasing equipment, rental payments, interest payments on debts, salaries of management personnel, etc. All these costs must be financed even when the company does not produce anything.

Variable costs (VC) are costs whose value changes depending on changes in production volume. If products are not produced, then they are equal to zero. Variable costs include the cost of purchasing raw materials, fuel, energy, transportation services, wages of workers and employees, etc. In supermarkets, payment for the services of supervisors is included in variable costs, since managers can adjust the volume of these services to the number of customers.

Total costs (TC) - the total costs of a company, equal to the sum of its fixed and variable costs, are determined by the formula:

Total costs increase as production volume increases.

Costs per unit of goods produced take the form of average fixed costs, average variable costs and average total costs.

Average fixed cost (AFC) is the total fixed cost per unit of output. They are determined by dividing fixed costs (FC) by the corresponding quantity (volume) of products produced:

Since total fixed costs do not change, when divided by increasing production volume, average fixed costs will fall as the quantity of output increases, because a fixed amount of costs is distributed over more and more units of output. Conversely, as production volume decreases, average fixed costs will increase.

Average variable cost (AVC) is the total variable cost per unit of output. They are determined by dividing variable costs by the corresponding quantity of output:

Average variable costs first fall, reaching their minimum, then begin to rise.

Average (total) costs (ATC) are the total production costs per unit of output. They are defined in two ways:

a) by dividing the sum of total costs by the number of products produced:

b) by summing average fixed costs and average variable costs:

ATC = AFC + AVC.

Initially, average (total) costs are high because the volume of output is small and fixed costs are high. As production volume increases, average (total) costs decrease and reach a minimum, and then begin to rise.

Marginal cost (MC) is the cost associated with producing an additional unit of output.

Marginal costs are equal to the change in total costs divided by the change in volume produced, that is, they reflect the change in costs depending on the quantity of output. Since fixed costs do not change, fixed marginal costs are always zero, i.e. MFC = 0. Therefore, marginal costs are always marginal variable costs, i.e. MVC = MC. It follows from this that increasing returns to variable factors reduce marginal costs, while decreasing returns, on the contrary, increase them.

Marginal costs show the amount of costs that a firm will incur when increasing production by the last unit of output, or the amount of money that it will save if production decreases by a given unit. When the additional cost of producing each additional unit of output is less than the average cost of the units already produced, producing that next unit will lower the average total cost. If the cost of the next additional unit is higher than average cost, its production will increase average total cost. The above applies to a short period.

In the practice of Russian enterprises and in statistics, the concept of “cost” is used, which is understood as the monetary expression of the current costs of production and sales of products. The costs included in the cost include costs for materials, overhead, wages, depreciation, etc. The following types of cost are distinguished: basic - the cost of the previous period; individual - the amount of costs for the manufacture of a specific type of product; transportation - costs of transporting goods (products); sold products, current - assessment of sold products at restored cost; technological - the amount of costs for organizing the technological process of manufacturing products and providing services; actual - based on actual costs for all cost items for a given period.

G.S. Bechkanov, G.P. Bechkanova