The existence of a manufacturing enterprise involves the expenditure of funds for wages, the purchase of materials and raw materials. The cost expression of these costs means production costs. What it is? These are the funds spent on resources used in the production of finished products. According to accounting data, they are equal to the cost of goods / services. The total amount consists of material costs, interest on bank loans, wages of all employees of the enterprise.
Within enterprise economics, cost elements are closely related to basic cost functions. Let's take a closer look at these categories.
Concept
Production costs are the total costs incurred by a company in connection with its activities. Most often they include spending on the purchase of raw materials, materials, semi-finished products and energy. Everything that is necessary for production, as well as wages for workers. It also includes expenses related to the use of land and real estate, depreciation of machinery and tools, and maintenance of capital.
These include costs that are directly or indirectlyassociated with the product. They create value, are closely related to the technological process of production of services and products.
Economists distinguish:
- Accounting expenses. Included in accounts. These include actual expenses (including depreciation) in accordance with applicable law.
- The opportunity cost. A reflection of the cost of lost profits that could have been made if the available resources were used to the best of the alternatives.
Every company strives to make a profit. Very often, a cost reduction strategy is used to increase it. They are an inevitable phenomenon that occurs during the production process, because the manufacture of goods requires a lot of materials or work from the entrepreneur. Many cost-cutting activities involve the technical side of manufacturing processes, such as using cheaper materials or changing technology. Cost analysis allows us to answer the question of how the function of production costs is reflected through their classification.
Classification
Cost function and cost types are concepts that are closely related to each other. The result of economic activity depends on the indicators of the cost of manufactured products and the funds spent on this process. Knowing what production costs are is necessary to establish their value and determine the difference between the cost of production and the amount spent on manufacturing. The calculation results are affected by the featuresimplementation of the technological and production process. A change in technology, the amount of raw materials is reflected in the amount of mandatory costs.
Costs are, first of all, the costs incurred by the enterprise in the manufacture of goods. Costs are the used funds in tangible and intangible form necessary for the production of finished products. According to the scale of assessment, they are divided into individual and public. The former evaluate the funds spent within a particular organization. Public - at the state level.
There are several types of production costs. According to the method of evaluation, they are divided into accounting and economic. In relation to the magnitude of the output of finished products are divided into fixed and variable. The most important indicators for evaluating the effectiveness of an enterprise are constants and variables.
Direct and indirect
Direct costs include:
- cost of materials used;
- acquisition and processing costs;
- other costs incurred to bring the product to the location and bring it to the condition it is in on the date of evaluation.
Indirect costs include variables and part of fixed production costs. These are expenses that cannot be directly included in the cost of the product. They are distributed evenly between the items of expenditure and are part of a certain base. They include:
- salary;
- cost of materials used;
- electricity and lighting;
- enterprise security;
- rent;
- advertising;
- staff costs;
- depreciation;
- office expenses;
- mobile communications;
- Internet;
- postal service.
What are fixed costs?
The funds spent within one cycle for the manufacture of goods are called fixed production costs. For a particular organization, certain regular investments are characteristic. They are individual and based on the analysis of the company's activities. The amount is the same for each release cycle from the moment of manufacture to the sale of finished products. The main feature of this indicator is a constant value over a certain period of time. With a decrease or increase in the volume of production, the amount remains unchanged.
Fixed costs are utility bills, staff salaries, costs of production facilities, rent of premises and land. It is important to know that the value of fixed costs incurred in one cycle will be unchanged relative to the total amount of output. If we compare the amount spent with the cost of one unit of goods, the costs will increase in proportion to the decrease in output. This pattern is typical for any manufacturing company.
Variable costs
This is a fluctuating rate,changing in every manufacturing process. Variable costs depend on the quantity of goods produced. These include payment for electricity, purchase of raw materials, piecework wages for employees involved in production. Such payments are directly related to the volume of products produced.
Examples
In any manufacturing enterprise there are costs, the amount of which remains unchanged under any circumstances. In parallel, there are costs, the amount of which depends on production factors. In planning for future periods, such indicators are not effective, they will change sooner or later. In the short run, fixed capital investment does not depend on the quantity of goods produced. Fixed investments depend on the direction of the enterprise. These include:
- interest on bank loans;
- depreciation of fixed assets;
- rent;
- wages of the administrative apparatus;
- bond interest payments;
- insurance payments.
Fixed costs include all funds spent that are not related to the release of finished products. All production costs are variable. Their size will always depend on the volume of goods produced. The investment in production depends on the planned quantity of the product. The variable costs of the enterprise include:
- purchase of raw materials;
- salaries of production staff;
- cost of transportation of raw materials and production equipment;
- consumables;
- energy resources;
- other costs associated with the manufacture of products.
Conceptual foundations of cost functions
They understand the connection between output and ensuring their minimum volume. That is, the main function of the firm's costs is to optimize production processes to achieve maximum volumes and involve minimum costs. Let's take a closer look at this concept.
The financial meaning of production costs depends on the amount of material costs for production factors. A better result of the correct policy of their formation is the growth of the enterprise's activities while minimizing costs.
Technological and production costs are taken as characteristics of industrial ones. Improvement of labor criteria, quality of equipment and resources leads to their minimization in the future. Cost reduction is also associated with the creation of the maximum amount of production with the existing ratio of production factors.
The present representation of industrial costs is interpreted as a valuation of labor and capital. In this case, land ownership as a factor is zero, since it is not subject to depreciation. When calculating between companies, the behavior of existing investments and the change in financial resources into material goods are taken into account.
Industrial costs differ in that the sale of products, the costs of sorting, packaging, storing and transporting goods representadditional expenses. They can only be obtained after the sale of the product. In addition, this category includes spending on advertising, remuneration of sellers. Such fixed costs are reimbursed from income after the sale of products. Industrial costs are directly dependent on long-term and short-term assets. As a result, long-term assets include the purchase of equipment and resources for a long period of use (more than a year), which means there are constant expenses for maintenance and depreciation to maintain the company's activities.
Current assets are assets used by a financial unit during one operating cycle (no more than a year).
The success of a company depends on the fact that profits must fully cover production costs. Before developing a specific event, a plan is formed that takes into account all types of industrial costs. Reducing these amounts and planning them are the main tasks of the company's management. In order for a business unit to work, make a profit and be profitable, it is necessary to have flexible and relevant solutions to various management issues.
Essence of the total cost function
This category determines the relationship between the volume of production and the amount of expenses. This concept underlies the firm's total cost function. According to this theory, the company's expenses are related to the prices of products, the amount of resources used. Accordingly, the result is better, the higher the output and the lower the costs. Tothe last category is reduced by factors:
- better working conditions;
- transition to automation processes;
- staff incentives;
- use of resource-saving technologies.
In this situation, the cost function looks like this:
TC (total spending)=f from (P - labor, P capital), where P - factor price.
Thus, according to the function of total costs, a graphical representation of the dependence of total costs on factors of production (labor and capital) is used. Materials are applied among other factors.
The graphic representation of this concept is expressed in isocost. In this case, all levels of labor and capital costs can have their own isocost. The slope and its bend depends on the price level and applied technologies.
Marginal cost and function
These are the extra costs to produce one more unit of output. The marginal cost function formula is the ratio of the increase in variable costs to the increase in the volume of goods. It looks like this.
MC=ΔTS/ ΔQ, where ΔTS is the increase in variable costs; ΔQ is the increase in production.
This cost function allows you to determine the degree of profitability of the production of each dopedin of products for the enterprise. It is an important economic tool that forms the strategy of the enterprise. The marginal cost level makes it possible to determine the volumesproduction of goods at which the company must stop ramping up production.
