Constant and variable costs

Before starting production, any company should have an idea of how much revenue it will receive as a result of the sale of the product. To do this, you need to study consumer demand, develop a pricing policy and compare the expected revenue with the magnitude of future costs. The cost of production involves the inclusion of costs incurred by the company as a result of production and sale of products.

The issue of spending is the key in the market economy. The competitiveness of any firm directly depends on the value of this indicator. If management has a clear understanding of the costs of production, it will be able to correctly identify the methods and methods that will allow them to reduce. In turn, this will allow you to reach the maximum return on the material resources used and to achieve the greatest efficiency of the production process.

It is the magnitude of the cost level that affects the size of the company's revenue, the possibility of its modernization and expansion, as well as competitiveness in the market. The expenses incurred by the enterprise during the production process show what it cost the production of this product. When analyzing commercial activities, various types of costs are taken into account. Allocate constant and variable costs, as well as gross costs.

The first type of costs include expenses that are carried out regardless of the number of products produced. These costs are borne by the company even in the absence of the goods being manufactured. They include:

- lease payments for used premises;

- amortization of production capacities;

- costs for the maintenance of administration and administration;

- the cost of equipment and its maintenance;

- the cost of electricity and heat, consumed for technological premises;

- protection of the production area;

- the amount of money spent on paying interest on loans.

To variable costs carry the expenses which size is connected with volume of made production. These include the cost of raw materials used for the manufacture of goods, as well as the wages of workers directly engaged in the technological process.

Constant and variable costs in the aggregate give the total (gross) costs of the organization. This is the totality of all the costs of the enterprise during a given period of time, which are necessary for the production of a certain product.

To conduct a more detailed analysis of the company's activities in order to make the right management decisions, determine the amount of costs per unit of output. For this, the following indicators exist:

- average fixed costs;

- average costs of variables;

- average general;

Marginal costs.

Consider the overall costs of the organization. They are divided into fixed and variable costs. It depends on the situation and the time period. Payments to insurance and pension funds, made on the basis of a collective agreement, can be classified as fixed costs. Variable costs of these same contributions will arise in the long run. It is then that there will be a need to increase the volume of manufactured goods and to replace technological equipment.

In each specific case, the organization itself makes the choice of how to divide its expenses into fixed and variable costs. For this purpose, the most capacious sector of production is taken into account. Work, materials or fixed assets may be attributed to it. If the technological process is labor-intensive, then the wage fund, with all the accruals on it, is attributed to variable costs. They also include materials with a large amount of their costs. In rare cases, variable costs are the amounts of depreciation charges of non-current assets. This happens with a high-volume production.