Theme 8. Costs and revenues of the enterprise (company)

8.1 Nature and types of costs

Costs of production of the company (cost) - all of the cost of the company for the production and sale of products. This includes the cost of materials and supplies, depreciation, wages and other types of costs.

Modern economic theory for a different approach to the treatment costs. It comes from the limitations of resources and their possible alternative uses. Limited resources mean that it is always necessary to choose, and the choice means giving up one in favor of another.

Production costs can be divided into external (explicit) and internal (implicit).

External (explicit) or accounting related to the fact that the firm pays employees, fuel, spare parts, ie all that it does not produce itself to create the product. Depending on the specialization of the value of external costs for the production of the same product range. Thus, the assembly plant the proportion of external costs more.

Internal costs (implicit) - owner of your own company or store does not pay himself salary, does not receive the rent for the building, which houses the shop. If he puts money in the trade, you will not get those interest that he had put them in the bank. Explicit costs are sometimes called accounting costs, and the amount of implicit and explicit call economic costs.

Costs are divided into independent of size and depending on the volume of products produced by the company, called the fixed and variable costs of production.

Fixed costs of production FC firm is independent of the volume of production. It is the costs of the Company, payment of interest on loans, taxes, depreciation and payroll costs management personnel. They will not change their output.

VC variable costs change with production volume. They represent the firm's costs for raw materials, wages, energy and transport. Division of costs into fixed and variable is applied to the short-term period of operation of the firm. In the short run, fixed costs remain the same, and the firm can change the amount of products just by changing the value of variable costs. In the long run all costs become variable, ie it is quite a long time interval for firm could change its production capacity.

Total cost TC is the sum of fixed and variable costs. Their size varies as a rule, with changes in the variable costs of production. Total costs are different from the variables only fixed costs.

C TC C MC AC

AVC

VC

FC

AFC

Q Q

Figure 10. Fixed, variable and Fig.11. Average and marginal

total costs of the company costs of firm

Us to know the value of costs per unit of output. Therefore, average the cost of production. Distinguish three types of average costs (Figure 11):

1) The average fixed cost AFC. They are fixed costs, divided by the volume of production. Since fixed costs do not change, then the AFC decreases as the volume of production:

AFC = FC

Q

2) The average variable cost AVC. They are variable costs divided by the volume of production:

AVC = VC

Q

3) The average total cost ATC. They represent the total cost divided by the volume of production ATS has costs per unit of output:

АТС =ТС

Q

They represent a link between the cost of production and its price. Comparing them with the price of the item, you can determine profitability or excessive production.

The company always strives to obtain maximum profit. To do this, it increases the volume of production, there is the additional cost of production. As far as they are effective, to judge the category of marginal costs of production.

The marginal cost МС (sometimes called incremental, marginal) costs are gains from the production of one additional unit of output:

М С= ТС

Q

Marginal costs are determined by the growth of only the variable costs of production as a result of an additional unit of output. They show. How much will my company increase its total output by one unit.

Opportunity cost (or opportunity costs) - costs of which the company refuses, when it uses its resources and is not lost due to the use of these resources in the best way. These costs represent the best use of resources of the firm. These costs are called opportunity costs.

The company is the so-called transaction costs. They are related to the fact that the company constantly makes contracts, carries out transactions with partners. So it is constantly necessary to negotiate, establish connections, negotiating conditions, gather the information you need to notify their future partners, i.e. exercise of market transactions. All this requires costs or transaction costs.