Total costs of production in the short run

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-17 18:37

Regardless of the quality and type of own resources involved in the creation of a product or service, the amount of their use affects the formation of production costs. In the short term, the cost indicators of the resources and factors expended by the firm can be both constant and variable.

What is a time slot

The short-term period is such a period of time in which the company is able to increase production volume at its previous production capacities, associated with a more intensive and high-quality use of existing equipment.

In the short run, a firm uses the fixed and variable factors of production needed to produce goods or provide services.

Fixed factors:

• amount of equipment used;
• service car fleet;
• suppliers of tolling raw materials;
• industry availabilitymanufacturers of similar products.

Variable indicators:

• raw materials and materials, the cost of which depends on the increase in production;
• fuel and electricity consumed from output;
• payment for piecework of workers.

These are indicators of the return or efficiency of the use of production factors. They are usually studied:

• creditors;
• owners;
• by investors.

Costs vary

As already noted, in the short term, the indicators of the factors of production involved are constant or variable. The firm's production costs in the short run will be fixed or variable, respectively.

Fixed costs are those costs that remain the same regardless of production volumes.

After all, even if there is no output, for example, the "shutdown" of the enterprise, fixed costs still remain.

These include:

• Rent.
• Major repair costs.
• Technical equipment of the enterprise: equipment, machines, other production facilities.
• Operating costs for the premises.
• Expenses for administrative and management personnel.

Variable costs, unlike the previous ones, change depending on the increase (decrease) in the volume of output or services rendered. Moreover, variable costs behave ambiguously: first they decrease according torelation to the volume of output, and then the volume in total terms of variable costs increases. This is explained by the law of diminishing returns of factors of production.

That is, at first, when increasing the rate of output, a small amount of variable costs is required, and then, as the development and increase in production volumes, more and more variable resources are spent, and variable costs grow accordingly.

These include:

• Costs associated with the purchase of raw materials and materials.
• Electricity costs.
• Acquisition of auxiliary materials needed to increase output.
• The cost of piecework workers due to increased productivity.

They are so different

Theoretically and practically, costs or costs of production in the short run are classified as fixed and variable. These are important indicators for determining the effectiveness of all factors of the enterprise.

The presence of fixed and variable costs always indicates a short-term period of production in the company's activities.

The total indicator of constant and variable values forms the total, gross costs.

It can be concluded that total costs are the interaction of the firm's fixed and variable costs in the short run.

Important: at zero production volume, total costs are identical to fixed costs and vice versa when increasing or increasing volumesproduction, the total cost of production in the short run increases in direct proportion to the increase in variable factors.

Unit indicators or unit costs

Dynamics of production costs in the short term, their dependence on the increase in production volume is calculated by comparing the values of fixed and variable costs.

In turn, in order to more accurately determine the efficiency of the firm, the costs incurred per unit of output are calculated. The indicators obtained are called average, unit or specific production costs in the short term, briefly - costs.

They are classified as follows:

1. Average total cost of production (ATC) - they can be calculated by adding the components of average fixed and variable costs, the indicator serves to compare with the price level for the company's products.
2. Average Fixed Costs (AFC) - As production increases, average fixed costs will decrease per unit of output.
3. Average variables (AVC) - the company's production costs spent on the manufacture of a unit of product. It is a measure of the efficiency of the firm's use of resources. It is the indicators of specific variable costs that determine whether the company will expand production, reduce it, or even leave the market.

Calculation of costs per unit of manufactured goods allows the company to "keep abreast", respond in a timely manner toincrease the cost rate, work more efficiently, develop the price of products with high quality.

In the event that the firm has started to produce additional products, it is necessary to calculate the marginal cost.

Types of production costs in the short run and their interaction with each other

All costs associated with the production of a unit of output in excess of the established output, that is, with the production of additional units of goods (services), are called marginal costs.

Marginal cost is calculated by dividing the rate of change in average cost by the rate of change in output.

For example, in the production of cosmetics, the company's variable costs increased from 1420 to 1600 rubles per unit of production. At the same time, the volume of manufactured products increased from 550 to 600 units of drugs.

Then the unit marginal cost will be:

MC (marginal cost)=(1600 - 1420): (600 - 550)=3, 6

Production costs and reasons for their change

Marginal cost varies with the volume of average (total) production costs.

However, different production costs behave differently in the short and long run.

For example, due to the fact that fixed costs do not change in the long run, they are always zero by definition in this time period.

Productivity is marginal product

Marginal cost is always marginal variable cost. Therefore, the calculation of average costs in the short run per unit of output is so important. Without it, it is impossible to calculate the marginal cost that a firm will have in the event of an increase in production, as well as calculate the margins for savings per unit of output produced.

Assuming that marginal (additional) cost is less than the average cost per unit, production will lower the next cost per unit. If the costs associated with the production of additional products are above average, then the production of products will show an increase in average costs.

There is a strong relationship between marginal cost and marginal product, which is understood as labor productivity: as long as the marginal product grows, there will be a decrease in marginal and average variable costs. Marginal and average product reach their maximum value at minimum marginal and variable costs.

The main achievement of the manufacturer will be the excess of the selling price of the goods over the marginal cost of its production.

Practical application of knowledge about costs

Any theory without application in practice will remain a toy in the hands of economists.

To prevent this from happening, I will give a few examples of applying the information received in practicefirms.

Calculate total costs correctly.

Example. The company's gross revenue in 2017 amounted to 3,200,000 rubles. The net profit of the enterprise was expressed in 400,000 rubles. In order to calculate the costs of the enterprise for 2017, you need to find out the difference between revenue and profit.

Change in production costs in the short run for the firm in this case will be expressed as follows:

3200,000 – 400,000=2,800,000 (RUB)

Costs of the enterprise in 2017 2800 thousand rubles

The practice of calculating fixed costs

To determine the amount of fixed costs, let's assume that the total costs of the company that produces eye lenses in March 2018 amounted to 700 thousand rubles. At the same time, variable costs are equal to 300 thousand rubles.

To calculate the amount of fixed production costs in the short run, you need to subtract the variables from the total costs.

Then the calculation for March costs will look like this:

700 – 300=400 thousand rubles.

In the same way, you can determine the change in variable costs.

Production cost structure and its definition

Production costs in the short run are the costs associated with the production of goods or services.

Assume that a sanitary ware manufacturing facility incurred the costs shown in the following table in H1 2016:

Costs or expense items	The value of the indicator in rubles
Raw materialand supplies	820 000
Staff salaries	1,350,000
Rental cost	300,000
Communal costs	60,000
Taxes and fees	480,000

Determine the cost structure at the selected enterprise.

Structuring involves determining the share of each item of expenditure in the total costs of the organization, taken as one hundred percent. In the proposed version, their total expression is 3,010,000 rubles.

The structure of production costs in the short run is shown in the table.

cost items	value of the indicator in rubles	share in total structure % cost
raw materials and supplies	820 000	27
wages	1350 000	46
rental	300,000	9
paying utilities services	60,000	2
taxes and fees	480,000	16

Enterprise costs, calculation method

Assume that the results of the excavator plant for the second quarter of 2018 showed the following data on production costs:

1. Expenses forpurchase of raw materials and materials: 2,800,000 rubles.
2. Payment of piecework wages to workers: 220,000 rubles.
3. Expenses to pay management: 150,000 rubles.
4. Payment of wages in the form of salaries: 315,000 rubles.
5. Rent of additional production premises: 100,000 rubles.
6. Payment for water supply: 5,000 rubles.
7. Electricity costs: RUB 8,160.
8. Heating: 6500 rubles.

We calculate the variable and fixed costs of the enterprise in the second quarter of 2018 and the variable average costs per unit of production, if 520 special equipment items were produced during this period.

For the accuracy of the calculation, it is necessary to determine the indicators in the following sequence:

• Variable costs like materials – the more we produce, the more units we produce.
• Fixed costs, such as rent, which will be paid whether the business is in operation or not, also includes director and management salaries, and other expenses.
• Group costs by types and their classification criteria.

Summing fixed costs:

• Payment of wages to management: 150,000 rubles
• Salary costs for management personnel: RUB 315,000
• Rent for additional production facilities: RUB 100,000
• Heating costs: RUB 6500

Total fixed costs at the enterprise in thousand rubles:

150 + 315 + 100 + 6.5=571.5 tr. or 571 500rubles.

Summing variable costs:

• Expenses for the purchase of raw materials and materials: 2,800,000 rubles
• The cost of paying piecework wages to workers: 220,000 rubles
• Expenses for water supply: 5000 rubles
• Payment for electricity: RUB 8,160

Total variable costs at the enterprise in thousand rubles:

2800 + 220 + 5 + 8, 16=3,033.16 thousand rubles or 3,033,160 rubles.

Due to the fact that during the considered time period the plant produced 520 units of products, the average variable costs per unit of production will be:

3 033 160: 520=RUB 5833

Thus, the calculation of costs in the enterprise in the short run showed the following characteristics of production:

• Total fixed costs amounted to 624,500 rubles
• Total variable costs amounted to RUB 3,033,160
• Variable costs per unit of output amounted to 5833 rubles.

A few words about the production function and the impact on costs

As it is clear from the previous material, the production process involves the creative consumption of the resources available at the enterprise. In this regard, there is a certain relationship between the volume of goods produced and the amount of production resources used for the manufacture.

It is usually expressed using a production function.

Conventionally, the entire complex of enterprise resources can be represented as general, as it were, averaged labor, financial,commodities.

Under this condition, the production function is written as follows:

Q=f (L+K+ M), where

Q - the maximum indicator of the produced volume of products under given conditions of technological equipment for the given indicators of labor - L, capital - K and spent materials - M.

Therefore, a production function is essentially an expression of the relationship between given factors of production to determine the interactions and share of participation of each indicator in the creation of goods or services.

Using various indicators of the factors of the function, you can find the optimal combination of all the indicators involved to achieve the maximum production volume. In addition, you can clearly see how the volume of production changes due to a change in the parameters of the function, determine the yet unidentified capabilities of the firm (enterprise).

Results and conclusions about the nature of costs and their role in production

The production of goods or services requires costs, while each firm tries to get the maximum profit from its activities.

To optimize the production process, they reduce their costs, which are essentially the total cost of labor, financial and raw materials for the production of products.

Costs happen:

• Explicit - salaries, bank commissions, loans, payment for transport, commission agreements.
• Implicit - internal costs of the firm, defined as the costs of maintaining and allocating resourcesowners, in monetary terms - the shortfall in the company's accounts.
• Regular - rent payments, utility bills.
• Variable costs can be reduced or increased within one enterprise depending on production volumes - these are raw materials, materials, hourly wages.
• Irretrievable - usually associated with the start of activity or a fundamental change in the scope of business.
• Average costs are calculated per unit of output.
• Marginal cost is a measure of incremental cost per unit produced.
• Distribution costs are the costs incurred in order to deliver the goods to the final consumer.

The main task of each company as a participant in the production process is to reduce production costs, optimize production costs and maximize profits.