The costs incurred by enterprises and organizations to create goods in order to ultimately receive the necessary profit from them are production costs.
Each production of services and goods is associated with the use of production factors: labor, natural resources and capital. The cost of these factors is determined by production costs.
How to maximize the use of these factors, given that Are resources limited? This problem is relevant for each enterprise.
Production costs are classified according to the method of cost estimation and in relation to the scale of production.
Cost classification
If you evaluate the sale as a seller, then in order to profit from the transaction, it is necessary first of all to recoup the costs that the organization incurred in the production of goods.
Economic costs production - this is the economic costs incurred in the production process. They include:
- company acquired resources;
- internal resources not included in the market turnover;
- profit that entrepreneurs see as business compensation for risk.
The entrepreneur aims to reimburse economic expenses in the first place, and if for some reason it cannot be done, he is forced to withdraw from the market into the sphere of activity of another direction.
Accounting production costs - payments and cash costs that are carried out by the company in order to acquire the necessary production factors on the side. These costs are usually less than economic due to the fact that they take into account the real costs of acquiring resources from external suppliers. Such expenses are legally registered and exist explicitly, which gives grounds for accounting.
Accounting costs include direct (direct production costs) and indirect (natural costs, overhead costs, interest payments to banks and others).
Opportunity Costs - The Difference Between Economic type of cost and accounting. This is the cost of manufacturing products that the company will not produce, since it uses resources. In other words, opportunity costs are costs of opportunities that have been missed. Each entrepreneur independently determines their value, depending on the desired profitability of the business.
Explicit costs are alternative costs, which take the form of financial payments to owners of resources and semi-finished products. They are determined by the sum of the costs of the company to pay for the acquired resources.
Implicit (imputed) costs are also opportunity costs representing the use of resources that belong to the company. They are determined by the cost of production resources located in the field of the enterprise.
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Production Costs [/ caption]
Conventionally, all the resources that are used in production are divided into two groups: resources, the scale of which can be changed quite quickly (for example, the cost of materials, raw materials, energy, labor) and resources, the volume of application of which can be changed only for a very long period of time (construction of a new production facility).
Cost analysis is usually carried out in two time intervals: production costs in the short term (in this case, the amount of resource remains constant, and production volumes can be changed), and production costs in the long term (you can change the amount of resource used in production).
Fixed, variable, gross costs
The company's production volumes are growing and entail an increase in costs. Any production does not develop indefinitely, and therefore costs are a very important factor in determining the effective size of an enterprise. For these purposes, divide production costs into fixed and variable.
Constant costs are the expenses of the enterprise that it incurs regardless of the volume of production activity. These include: equipment costs, rental fees, remuneration of the administrative and managerial staff.
Costs variables - the costs of the enterprise, depending on the scale of production. This includes: advertising costs, transportation, property tax, raw materials costs and workers.
In the short term, both variable and fixed costs are acceptable, and in the long term, only variables.
Gross costs are the sum of two types costs: permanent and variables. This is the company's cash costs for the production.
The rule of minimum production costs and profit when using resources
Analyzing production costs and profits, consider the thesis that the costs of economic resources are the basis for the production of any goods and services. Based on this, a number of questions may arise:
- How to maximize the company's profit when using certain resources?
- What combination of several resources used in production should be in order for the company to be provided with the opportunity to produce products with minimal costs?
- How, using multiple resources, to maximize revenue?
All firms produce such a volume of their products that the maximum income they receive corresponds to marginal cost.
The rule of least cost states that the costs of any quantity of production are minimized if the marginal product is the same for each unit of cost of each resource.
If for any reason the cost level changes, then the cost graphs are shifted. When costs decrease, the graphs shift down, when they increase, the graphs shift upward accordingly.
Cost minimization is one of the main and important sources of increasing the competitiveness of each enterprise.
Given the current market prices for goods and services, cost reduction entails additional profitable profit, which means the prosperity and success of any enterprise.
