How to find the average cost of production. How to Calculate 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,

Consequently,

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)

Allows you to calculate the minimum price of goods / services, determine the optimal sales volume and calculate the value of the company's expenses. There are various methods for calculating the types of costs, the main ones are given below.

Production Costs - Calculation Formulas

The calculation of production costs is easily performed on the basis of cost estimates. If such forms are not compiled in the organization, data from the reporting period of accounting will be required. It should be borne in mind that all costs are divided into fixed (the value is unchanged over the period) and variable (the value varies depending on the volume of production).

Total production costs - formula:

Total costs = Fixed costs + Variable costs.

This method of calculation allows you to find out the total costs for the entire production. Detailing is carried out by departments of the enterprise, workshops, product groups, types of products, etc. Analysis of indicators in dynamics will help predict the value of production or sales, expected profit / loss, the need to increase capacity, the inevitability of reducing the cost.

Average production costs - formula:

Average costs \u003d Total costs / Volume of manufactured products / services performed.

This indicator is also called the total cost of the product/service. Allows you to determine the level of the minimum price, calculate the efficiency of investing resources for each unit of production, compare mandatory costs with prices.

Marginal cost of production - formula:

Marginal Costs = Change in Total Costs / Change in Output.

The indicator of the so-called additional costs allows you to determine the increase in the cost of issuing an additional volume of GP in the most profitable way. At the same time, the value of fixed costs remains unchanged, variable costs increase.

Note! In accounting, the expenses of the enterprise are reflected in the expense accounts - 20, 23, 26, 25, 29, 21, 28. To determine the costs for the required period, you should sum up the debit turnovers on the accounts involved. Exceptions are internal turnovers and balances at refineries.

How to calculate production costs - an example

From the above example, it can be seen that the organization incurs fixed costs in the amount of 1200 rubles. in any case - in the presence or absence of production of goods. Variable costs for 1 pc. initially amount to 150 rubles, but the costs are reduced with the growth of production. This can be seen from the analysis of the second indicator - Average costs, the decrease of which occurred from 1350 rubles. up to 117 rubles. per unit of finished product. Marginal cost calculation can be determined by dividing the increase in variable costs by 1 unit of product or by 5, 50, 100, etc.

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 more 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.

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.

All types of costs of the company in the short run are divided into fixed and variable.

fixed costs(FC - fixed cost) - such costs, the value of which remains constant when the volume of output changes. Fixed costs are constant at any level of production. The firm must bear them even in the case when it does not produce products.

variable costs(VC - variable cost) - these are costs, the value of which changes with a change in the volume of output. Variable costs increase as output increases.

Gross costs(TC - total cost) is the sum of fixed and variable costs. At a zero level of output, gross costs are equal to fixed costs. As the volume of production increases, they increase in accordance with the growth of variable costs.

Examples of different types of costs should be given and their change due to the law of diminishing returns should be explained.

The average costs of the firm depend on the value of the total fixed, total variable and gross costs. Medium costs are determined per unit of output. They are commonly used for comparison with unit price.

In accordance with the structure of total costs, firms distinguish between average fixed (AFC - average fixed cost), average variables (AVC - average variable cost), average gross (ATC - average total cost) costs. They are defined as follows:

ATC=TC:Q=AFC+AVC

One important indicator is marginal cost. marginal cost(MC - marginal cost) - this is the additional cost associated with the production of each additional unit of output. In other words, they characterize the change in gross costs caused by the release of each additional unit of output. In other words, they characterize the change in gross costs caused by the release of each additional unit of output. Marginal cost is defined as follows:

If ΔQ = 1, then MC = ΔTC = ΔVC.

The dynamics of the total, average and marginal costs of the firm using hypothetical data is given in Table.

Dynamics of total, marginal and average costs of the firm in the short run

Based on the table. we will construct graphs of fixed, variable and gross, as well as average and marginal costs.

The fixed cost graph FC is a horizontal line. Graphs of variables VC and gross TC costs have a positive slope. In this case, the steepness of the curves VC and TC first decreases, and then, as a result of the law of diminishing returns, increases.

Average fixed cost AFC has a negative slope. Average variable cost curves AVC, average gross cost ATC and marginal cost MC are arcuate, i.e. they first decrease, reach a minimum, and then become towering.

Attracts attention dependence between plots of mean variablesAVCand marginal MC costs, as well as between curves of average gross ATC and marginal MC costs. As can be seen in the figure, the MC curve intersects the AVC and ATC curves at their minimum points. This is because as long as the marginal, or incremental, cost associated with the production of each additional unit of output is less than the average variable or average gross costs that were before the production of this unit, the average cost decreases. However, when the marginal cost of a particular unit of output exceeds the average that was before its production, the average variable and average total costs begin to increase. Consequently, the equality of marginal costs with average variable and average total costs (points of intersection of the MC graph with the AVC and ATC curves) is achieved at the minimum value of the latter.

Between marginal productivity and marginal cost there is a reverse addiction. As long as the marginal productivity of a variable resource increases and the law of diminishing returns does not apply, marginal cost will decrease. When marginal productivity reaches its maximum, marginal cost is at its minimum. Then, as the law of diminishing returns kicks in and marginal productivity declines, marginal cost rises. Thus, the marginal cost curve MC is a mirror image of the marginal productivity curve MP. A similar relationship also exists between the graphs of average productivity and average variable costs.