Average production costs and other cost classifications

Any production can not do without costs. The costs (or costs) are the costs of acquiring various factors of production.

Such costs can be considered and analyzed in different ways. During the formation of economic theory, dozens of different classification systems and formulas for calculating costs were formed. Since the middle of the 20th century, two main types of classification have spread:

• For the estimation of production costs;
• In relation to the cost of production.

Costs by the method of estimating costs are divided into economic, accounting and alternative.

Economic costs are all the economic costs incurred by the entrepreneur directly in the production process. Typically, this is the cost of acquiring external resources (materials for production, tools, etc.), payment of internal resources of the firm that are not included in the market, and obtaining a normal profit as compensation for business risk.

Accounting costs are payments and other financial expenses incurred by the firm for the acquisition of external factors of production.

Accounting costs can be divided into direct (costs directly to production) and indirect (overhead, depreciation, payments to the bank, etc.).

Between economic and accounting there are also alternative costs. In fact, these are the costs of missed opportunities, which every entrepreneur counts on his own.

In relation to the cost of production in a small period of time, they are divided into permanent, variable and general.

Constant costs are costs that do not depend on the size and volume of production, which must be paid in any case. This includes salary to the permanent staff of employees and managers, depreciation, loan and insurance payments, rent of premises and squares and other costs associated with the very existence of the firm.

Variable costs are the costs of variable resources, which can vary depending on the volume of production. This includes costs for materials, salaries of production personnel, transportation costs, electricity fees, etc. The more production volumes - the higher the variable costs.

Constant and variable costs total the total costs of production. If the volume of production is zero, the total costs consist only of the value of the constants. When production begins, the total costs gradually increase their value, respectively, adding the variable costs to the total.

To calculate and compare the efficiency of production, its average costs are calculated, which can be briefly defined as the profitability of the production of a certain quantity of products, conditionally called the unit of production.

Average costs are expenses that fall on one unit of the produced product. They are also divided into permanent, variable and general.

Constant average costs are the same fixed costs, but in terms of unit of output. Their peculiarity is that they vary depending on the volume of sales of products, and not on the volume of production.

Average total costs are variable costs, recalculated per unit of output. They are directly influenced by the principles of decreasing and increasing returns to factors of production. Under the influence of the principle of increasing returns, the total average costs first fall, reaching a certain level, and then begin to increase steadily under the influence of the principle of diminishing returns.

The total average cost is the sum of all costs per unit of output. To calculate them, you can use two methods:

• To divide the sum of total costs by the number of products;
• Add the values of mean variables and average fixed costs.

The lowest value of average total costs determines the most efficient and profitable level in short-term production.