Let's talk about costs, cost formulas and why they are used

In this article you will learn about costs, cost formulas, and also understand the meaning of their division into different types.

The costs are called such money resources, which need to be spent for carrying out economic activities. Analyzing the costs (cost formulas are given below), one can conclude on the effectiveness of enterprise management of its resources.

Such production costs are divided into several types, depending on how they are affected by changes in production volumes.

Constant

Constant cost means such costs, the amount of which is not affected by the volume of products. That is, their magnitude will be the same as when the company is working in a strengthened mode, fully using production facilities or, conversely, during production downtime.

For example, such costs can be administrative or some separate items from the amount of general production expenses (office rent, maintenance costs of engineering and technical personnel not related to the production process), employee salaries, contributions to insurance funds, license costs, software Security and others.

It is worth noting that in fact, absolutely such costs can not be named. Still, the volume of production can affect them, though not directly, but indirectly. For example, an increase in the volume of output may require an increase in free space in warehouses, additional maintenance mechanisms that wear out more quickly.

Often in the literature, economists often use the term "conditionally fixed production costs."

Variables

In contrast to fixed costs, variable costs directly proportional to the volume of output.

In this type of raw materials, materials, other resources that are involved in the production process , electricity and many other types of costs. For example, if you increase the production of wooden boxes by 100 units, you need to purchase the appropriate amount of material from which they will be produced.

The same costs can relate to different types

And the same costs can relate to different types, and, accordingly, it will be different costs. The cost formulas for calculating such costs absolutely confirm this fact.

Take, for example, electricity. Light lamps, air conditioners, fans, computers - all this equipment, which is installed in the office, works at the expense of electricity. Mechanical equipment, machines and other equipment that participates in the process of production of goods, products, also consumes electricity.

At the same time, in financial analysis, electricity is clearly divided and relates to different types of costs. Because in order to perform the correct forecasting of future costs, as well as accounting for current costs, a clear separation of processes depending on the intensity of production is necessary.

Total production costs

The sum of variables and fixed costs is called "total costs". The calculation formula is as follows:

Io = Ip + Iper,

Where:

Io - total costs;

Ip - fixed costs;

Iper - variable costs.

Using this indicator, you determine the total level of costs. His analysis in the dynamics allows you to see the processes of optimization, restructuring, reducing or increasing the volume of production and management processes in the enterprise.

Average production costs

By dividing the sum of all costs per unit of output, you can find out the average costs. The calculation formula is as follows:

Is = Io / Op,

Where:

Average costs;

Op - the volume of products produced.

This indicator is also called the "total cost of one unit of manufactured products". Using such an indicator in economic analysis, one can understand how effectively the enterprise uses its resources for production. Unlike the general, average costs, the formula of calculation which is resulted above, show efficiency of financing for 1 unit of made production.

Marginal Costs

To analyze the feasibility of changing the number of products produced, use an indicator that displays production costs per additional unit. It is called "marginal cost". The calculation formula is as follows:

Ipr = (IO2 - IO1) / (Op2 - Op1),

Where:

Ypres - marginal costs.

This calculation will be very useful if the management personnel of the enterprise has decided to increase production volumes, expand and other changes in production processes.

So, after you have learned about the costs, cost formulas, it becomes understandable why in economic analysis the costs for the basic production, administrative and managerial, and also general production costs are clearly divided.