Average total cost formula. Marginal Cost and Marginal Revenue of Production

short term - this is the period of time during which some factors of production are constant, while others are variable.

Fixed factors include fixed assets, the number of firms operating in the industry. In this period, the company has the opportunity to vary only the degree of utilization of production capacities.

Long term is the length of time during which all factors are variable. In the long run, the firm has the ability to change the overall dimensions of buildings, structures, the amount of equipment, and the industry - the number of firms operating in it.

fixed costs ( FC ) - these are costs, the value of which in the short run does not change with an increase or decrease in the volume of production.

Fixed costs include costs associated with the use of buildings and structures, machinery and production equipment, rent, major repairs, as well as administrative costs.

Because As production increases, total revenue increases, then average fixed costs (AFC) are a decreasing value.

variable costs ( VC ) - These are costs, the value of which varies depending on the increase or decrease in the volume of production.

Variable costs include the cost of raw materials, electricity, auxiliary materials, labor costs.

Average Variable Costs (AVC) are:

Total costs ( TC ) - a set of fixed and variable costs of the company.

Total costs are a function of the output produced:

TC = f(Q), TC = FC + VC.

Graphically, the total costs are obtained by summing the curves of fixed and variable costs (Figure 6.1).

The average total cost is: ATC = TC/Q or AFC +AVC = (FC + VC)/Q.

Graphically, ATC can be obtained by summing the AFC and AVC curves.

marginal cost ( MC ) is the increase in total cost due to an infinitesimal increase in production. Marginal cost is usually understood as the cost associated with the production of an additional unit of output.

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 with different production volumes and their economic meaning. In order to understand all this simply, at the end, an example of variable cost analysis based on the break-even point model is analyzed.

Variable costs of the enterprise. Definition and their economic meaning

Enterprise variable costs (Englishvariablecost,VC) are the costs of the enterprise/company, which vary depending on the volume of production/sales. All costs of the enterprise can be divided into two types: variable and fixed. Their main difference lies in the fact that some change with an increase in production, while others do not. If the production activity of the company stops, 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.
• The cost of manufactured products.
• Wages of working personnel (part of the salary depending on the fulfilled norms).
• Percentage of sales to sales managers and other bonuses. Interest paid to outsourcing companies.
• Taxes that have a tax base of the size of sales and sales: excises, VAT, UST from premiums, tax on the simplified tax system.

What is the purpose of calculating enterprise variable costs?

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 an increase in income or a decrease in costs. If we generalize these two goals into one indicator, we get - the profitability / profitability of the enterprise. The higher the profitability of an enterprise, the greater its financial reliability, the greater the ability to attract additional borrowed capital, expand its production and technical capacities, increase its intellectual capital, increase its market value 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 stock as "variable costs" in the balance sheet.

Determining the amount of variable costs in the overall structure of all costs of the enterprise allows you to analyze and consider various management strategies to increase 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, often variable costs do not always depend on the size of sales and output, therefore they are called conditionally variable (for example, the introduction of automation of a part of production functions and, as a result, a decrease in wages for the production rate of production personnel).

The situation is similar with fixed costs, in reality they are also conditionally fixed, and can change with the growth of production (an increase in rent for production premises, a change 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:

• proportionate costs. Elasticity coefficient =1. Variable costs increase in direct proportion to the increase in output. For example, the volume of production increased by 30% and the amount of costs also increased by 30%.
• Progressive costs (similar to progressive variable costs). Elasticity coefficient >1. Variable costs are highly sensitive to changes depending on the size of output. That is, variable costs increase relatively more with output. For example, the volume of production increased by 30%, and the amount of costs by 50%.
• Degressive costs (similar 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 changing the volume of production and the size of variable costs for their various types.

According to the statistical indicator, there are:

• General variable costs ( EnglishTotalvariablecost,TVC) - will include the totality of all variable costs of the enterprise for the entire range of products.
• Average variable costs (English AVC, Averagevariablecost) - average variable costs per unit of production 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 production. 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 production separation of milk into skimmed milk and cream. It is problematic to determine the amount of costs in the cost of skimmed milk and cream.

In relation to the production process:

• Production variable costs - the cost of raw materials, materials, fuel, energy, wages of workers, etc.
• Non-manufacturing variable costs - costs not directly related to production: selling and management costs, for example: transportation costs, commission to an intermediary / agent.

Variable Cost/Cost Formula

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

Variable costs = Cost of raw materials + Materials + Electricity + Fuel + Bonus part of Salary + Percentage of sales to agents;

variable costs\u003d Marginal (gross) profit - Fixed costs;

The totality of variable and fixed costs and constants make up the total costs of the enterprise.

General costs= Fixed costs + Variable costs.

The figure shows a graphical relationship between the costs of the enterprise.

How to reduce variable costs?

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

scale effect graph shows that with an increase in production, a turning point is reached, when the relationship between the size of costs and the volume of production becomes non-linear.

At the same time, the rate of change of variable costs is lower than the growth of production/sales. Consider the causes of the “scale effect of production”:

1. Reducing the cost of management personnel.
2. The use of R&D in the production of products. An increase in output and sales leads to the possibility of carrying out expensive research and development 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 scrap.
4. Release of products similar in the technological chain, additional capacity utilization.

Variable costs and the break-even point. Calculation example in Excel

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 amount of profit and loss is the same, net profit is zero, and marginal profit is equal to fixed costs. This point is called breakeven point, and it shows the minimum critical level of production at which the enterprise is profitable. In the figure and the calculation table below, it is achieved by producing and selling 8 units. products.

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

Consider an example of what happens to the break-even point as variable costs increase. The table below shows an example of a change in all indicators of income and expenses of the enterprise.

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

This model, as a rule, operates with linear dependencies between the volume of production and income/costs. In real practice, dependencies are often non-linear. This arises due to the fact that the volume of production / sales is affected by: technology, seasonality of demand, the 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 the variable costs / costs of the 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 the enterprise in management accounting, for creating planned targets for departments and managers to find ways to reduce their weight in total costs. To reduce variable costs, you can increase the specialization of production; expand the range of products using the same production facilities; increase the share of research and production developments to improve the efficiency and quality of output.

Variable costs are the company's expenses spent on the production or sale of goods and services, the amount of which varies depending on the volume of production. This indicator is used to calculate the possibility of reducing the costs of the enterprise.

The main purpose of calculating variable costs

Any economic indicator serves a single goal - to increase the profitability of the enterprise. Variable costs are no exception. They allow you to analyze the company's activities and develop a strategy to increase profitability. Accordingly, this indicator is absent in the balance sheet, since it is needed not for accounting, but for management accounting.

Important! A clear distinction should be made between fixed and variable costs. The first are those whose amount does not change for a long time. For example, office rent, tuition fees, retraining of employees of the enterprise and other fixed costs.

The main types of variable costs

First of all, variable costs are divided into two main subgroups:

1. Direct- these are expenses that are directly related to the cost of goods (services). For example, the cost of materials, wages, etc.
2. Indirect- these are expenses related to the cost of a group of goods (services). For example, general factory, general warehouse and other types of general costs that affect the cost of all goods or their individual groups.

Some businessmen believe that variable costs are proportional to the volume of production. However, this is not always the case. According to the volume of production, variable costs are divided into three types:

1. Progressive. This is a type of cost in which costs increase faster than the growth in sales or production of goods.
2. Regressive. With this type of cost, the costs lag behind the pace of production or sales.
3. Proportional. This is precisely the case when the increase in costs is directly proportional to the increase in production volumes.

Consider an example of changing variable costs by volume of production:

You can also distinguish the type of costs by interconnection with the production process:

1. Production costs are costs that are directly related to the goods produced. For example, raw materials, consumables, energy, wages, etc.
2. Non-production costs are costs that are not directly related to the production of products. For example, transportation, storage, commission payments to dealers and other types of indirect costs.

Accordingly, variable costs include:

• Piecework bonus payments to employees (bonuses, commissions, percentages of sales, etc.);
• travel and other related payments;
• costs of storage, transportation and warehousing of goods;
• outsourcing and other types of services used to service production;
• taxes for the manufacture and / or sale of goods and services;
• payment for fuel, energy, water and other utility bills;
• the cost of purchasing raw materials and consumables for the production of products.

Detailed instructions for calculating variable costs

To calculate costs, you need to determine the material costs for the production of products. This is done on the basis of the following documents:

• reports on the write-off of raw materials, consumables and other materials for the production of goods;
• acts of work performed on the main and auxiliary production processes;
• reports of outsourcing companies involved in the production of products;
• returns for waste materials.

Important! The amount of material costs includes data only on the first three items from this list. The last point (on the return of waste) is deducted from the amount of costs.

Then you need to determine the amount of costs for paying the variable part of salaries to employees of the enterprise. This includes premiums, interest, commissions, allowances, payments to the Social Insurance Fund and other types of additional payments.

Based on the data on actual consumption and prices set in the region of production, the amount of costs for utility costs and fuel is determined.

After that, the sum of the costs for packaging, storage and delivery of products is calculated. This can be done on the basis of internal documents of the company or reports of third parties responsible for these stages of work.

After all this, the amount of tax costs is determined on the basis of declarations or accounting reports of the company.

Important! Please note that reducing the variable costs of taxes, fees and other obligatory payments is possible only if appropriate changes are made to federal or regional legislative acts. However, in the calculation they must be taken into account without fail.

Formula for calculating variable costs

The easiest way to calculate variable costs is to simply add up all the costs and then divide by the volume of goods produced during the analyzed period of time. The calculation formula is:

PI \u003d (VI¹ + VI² + VI∞) ÷ OP, where:

• PI - variable costs;
• VI - type of costs (fuel, taxes, bonuses, etc.);
• OP is the volume of production.

Variable Cost Example

In 2017, Romashka LLC spent on the production and sale of products:

• 350 thousand rubles for the purchase of materials;
• 150 thousand rubles for packaging and storage of goods;
• 450 thousand rubles to pay taxes;
• 750 thousand rubles for piecework bonus payments to employees.

Accordingly, the total amount of variable costs amounted to 1.7 million rubles. (350 thousand rubles + 150 thousand rubles + 450 thousand rubles + 750 thousand rubles). The volume of production amounted to 500 thousand units of goods. Accordingly, the variable costs per unit of production amounted to:

RUB 1.7 million ÷ 500 thousand units = 3 rubles 40 kop.

Not a single production, even the most modern, can do without costs. In this case, costs are the various types of resources used in production (raw materials, energy, labor, etc.) that have a cost form. At the same time, there is still no single concept of this economic category. For the purposes of the analysis, there are several bases for classifying costs. For example, in the case of the accounting approach, costs are the actual costs of various production resources for the production of products at the cost of their purchase by the enterprise and form the cost of production.

Regarding the volume of output in the short run of the firm's activity, fixed, variable, general, average and marginal costs can be distinguished.

Posted on www.site

A feature of fixed costs (FC) is that their value does not depend on the volume of production: for example, a firm must pay interest on a loan received, regardless of whether it produces products or not. A feature of variable costs (VC) is the dependence of their total value on the volume of production - the larger the volume of output, the more the company spends, for example, raw materials. The sum of fixed and variable costs forms the total (or gross) costs of the firm, i.e. TC = FC + VC.

Not only data on the total value of one or another type of cost are important, but also their volume per unit of production, for which average costs are calculated: general (gross), fixed and variable. The volume of output at which the value of the average gross cost is the smallest is the optimal (most profitable) volume of production for the company in terms of costs.

Also, the firm needs to control its marginal cost (MC), which shows what costs the firm will incur if it produces one more unit (or, accordingly, the amount of savings in reducing output per unit). Marginal cost MC is the additional cost required to produce an additional unit of output. The value of marginal cost is not affected by the amount of fixed costs, it depends on changes in variable costs.

54. Average fixed (AFC), variable (AVC) and total (ATC) costs

The study of average costs is a powerful tool in economic analysis.

Average fixed costs are the costs of a fixed resource with which a unit of output is produced on average. Average fixed costs are determined by the following formula:

AFC = TFC / Q,

where AFC - average fixed costs; TFC - fixed costs; Q - the amount of output.

There is an inverse relationship between average fixed cost and average product for a fixed resource:

AFC = P K / A x P K

where P k is the price of a unit of a permanent resource; A x P k - the average product for a constant resource.

AFC = TFC / Q;

TFC = PK x K,

where K is the amount of a permanent resource;

A x P K x t = Q / K

AFC = TFC / Q = (PK x K) / Q = PK / (A x PK)

The plot of average fixed costs is a parabola, asymptotically approaching the abscissa and ordinate axes. As output increases, average fixed costs decrease, which is a powerful incentive for the firm to increase output. Average variable costs are the costs of a variable resource with which a unit of output is produced on average. Average variable costs are determined by the formula:

AVC=TVC/Q

There is also an inverse relationship between average variable costs and the average product for a variable resource:

AVC = P L / (A x P L)

where A x P L is the average product for a variable resource; P L - unit price of a variable resource.

AVC=TVC/Q;

TVC = P L x L,

where L is the amount of the variable resource.

A x P L = Q / L

AVC = TVC / Q = (P L x L) / Q = P L / (A x P L)

The change in average variable costs is due to an increase or decrease in the return on a variable resource. If A X P L grow AVC - fall; if A X P L decrease, AVC - increase Therefore, the graph of average variable costs first decreases and then increases, reaching a minimum at the point corresponding to the minimum of AP L .

Average total (total) costs are the costs of variable and fixed resources with which a unit of output is produced on average.

Average total costs are determined by the formula:

ATC=TC/Q

where ATC - average total costs; TC - gross costs; Q - the amount of output.

TC = TFC + TVC,

hence,

ATC = TC / Q = (TFC + TVC) / Q = (TFC / Q) + (TVC / Q) = = AFC + AVC

By comparing the average total cost with the price of a unit of output, the entrepreneur can estimate his profit from each product produced.

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