SECTION 0.

BARBOS HAS QUESTIONS. What is cost?

BARBOS. I don’t presume to judge everyone, but it is clear to me that the cost of my work, when I guard my Anton at home and in his director’s office, measures what efforts of my considerable mind, what energy and what time this useful work costs me.

ANTON. Igor, in this lecture we will try to replace the term “cost” with the term “cost”.

IGOR. Let's try it. Maybe our readers will like this?

ANTON. If they carefully read Appendix II then there should be no objections.

IGOR. So what is cost? And how to measure it?

ANTON. There are probably no more difficult questions in the world than these.

IGOR. Don't worry, Anton. You and I have already said some important words on this matter. Do you remember how in the 21st lecture it was told what we lose and what we find when we use resources to produce wooden furniture?

ANTON. Yes, yes, I remember. If we produced a chair, then the cost, oops, sorry, the cost of production, should be measured as the utility of the paper that could be obtained from the wood used to make the chair.

IGOR. Of course, paper, wooden houses, chess pieces, and many other things that are made from wood.

ANTON. Why do we need to compare all these alternative uses of wood?

“Why do you need big ears, and why do you need big teeth?” We know how it all ended!

IGOR. This is to know what kind of world you live in, that is, to know the true economic costs, or rather, the true economic cost. After all, it may well happen that there is nowhere to put the furniture you want to produce in stores, but wooden cottages are in very short supply.

ANTON. Now I'm starting to understand what's going on. This way I always know what I'm getting into. Most likely, under these circumstances, I will use wood to build cottages that are in short supply. It is now clear to everyone that a cubic meter of wood invested in cottages is much more useful to the consumer than a cubic meter invested elsewhere.

IGOR. You say it’s more useful, that is, the consumer is willing to pay much more per cubic meter invested in cottages than, for example, in furniture.

ANTON. Yes Yes Yes. That's right, it smells like good profit here.

BARBOC. Smells like profit... sounds strange. If there's anything that smells, it's roasted meat. And money, if you smell it, doesn’t smell at all. I admit, theoretically of course, that there is a financial sense of smell.

IGOR. You see, Anton, if you choose between furniture and a cottage, then the economic cost of furniture production will precisely include the profit that you did not want to make on cottages. Therefore, you will have to think carefully about how to cover such a cost with revenue.

ANTON. Who told you that I didn't want to? I wanted, I really wanted to build cottages.

IGOR. Fine. So be it. You build cottages. Tell me now: what is the opportunity cost of producing cottages?

ANTON. Cottages are currently the most profitable investment of a resource, and paper production is slightly inferior in return. The opportunity cost of building cottages will be assessed as the value of losses if the resource is not used in the best of the alternative ways.

IGOR. In other words, will it now include profits from paper production?

ANTON. Certainly. It is important that you evaluate your losses or your value based on the best of the alternative options.

IGOR. What if the alternatives are to work or study?

ANTON. Then you invest a monetary resource in human capital, and the alternative cost is the earnings not received during training. Our reader knows about this from the 18th lecture.

IGOR. Look what happens. Each manufacturer immediately solves one problem - seeking maximum profit - in three ways: first, by comparing which and where to use resources; secondly, by determining the volume of output according to the law of diminishing returns; and finally, thirdly, focusing on returns to scale in determining the size of the enterprise.

AHTOH. Why right away, because you can solve this problem, as you yourself said, firstly, secondly, thirdly?

IGOR. It seems to me that if you have already chosen the profile of your workshop, which produces, for example, sewing products, you still shouldn’t doze off. After all, the movement of resources can be carried out under the influence of the whim of fashion, as we have already seen. And if we talk about the period in which the enterprise lives, then in our garment factory different sections or workshops, due to the different ages of buildings and equipment, can be located in a short, and in the long term.

BARBOS. So so so. I work from home (one might say for free), but I could guard a department store and receive (closes eyes) a decent salary. Science, of course, awakens thought, but thought deprives me of the peace that I so need.

Lecture 23. Costs

As we have seen, based on the firm's production function and the prices of production factors, it is possible to determine the firm's costs for a given volume of output.

If human activity did not require costs, then there would be no economic science. In everyday life, most people - consciously or intuitively - fairly accurately assess the costs of their actions and make rational choices. A professional economist is different from other mortals in that he is able to clearly explain how costs influence decisions. At the same time, he uses concepts specially developed for this purpose.

First of all, an economist approaches cost measurement differently than an accountant. The accountant records actual cash expenses; his goal is to prepare a balance sheet and report that reliably reflect completed transactions. The accountant's gaze is turned to the past. The economist looks into the future, he is interested in the costs that will still be required in connection with this or that decision. To the economist, only that which has an alternative useful use is a cost.

Let you be the owner of a small company in which you yourself perform the duties of a manager. You pay wages to your employees and rent for the premises. This is definitely your cost. But let's say you don't pay yourself a salary and are content with your profits. Will your costs be lower and your profits greater? From an accounting point of view, yes. However, an economist, when calculating your costs, will certainly include in them the wages that you would receive if you worked for hire where you are able to earn the most - with your training and your talents. The salary you sacrifice to run your own business is your opportunity cost, or opportunity cost.

In this section we will limit our discussion of costs to the short term. As we know (Lecture 22), a short period is a period of time during which some factors of production (resources) are constant, that is, the volume to which they are used by the company does not change following a change in the volume of production or its complete termination. Fixed factors of production can be, for example, factory buildings and structures, equipment. Other factors of production are variable; these are, for example, labor and materials. In a short period, a company cannot enter or leave the market for a given product. Such decisions are associated with changes in the quantities of all factors of production.

There are many reasons why factors appear to be constant over short periods of time. One of them is that if you need to build new buildings and install equipment in them to expand production, then this cannot be done as quickly as, say, purchasing more materials or hiring a certain number of workers. If the demand for your company’s products has decreased, then you will have to put up with “extra” buildings and equipment for quite a long time.

How long is the short period? The answer depends on the industry's production technology and the legal environment in which the firm operates. For example, in shipbuilding a short period is quite long. The company must be sure that the price of ships has risen for a long enough time to decide to build another shipyard or expand existing workshops. On the contrary, a company producing Christmas tree paper garlands has a very short period of time.

In decision making, only opportunity costs matter. Their opposite is sunk costs. Sunk costs are irrecoverable fixed costs. They are constant because they do not change as the firm changes its output, and they are irreversible because they cannot be returned by reducing or stopping production. Since these costs cannot be avoided (in the short term), they should not be taken into account when choosing behavior. Costs may be irreversible only in the short term. In the long run, any costs are reversible in the sense that they can be avoided by leaving the market.

Opportunity costs are divided into explicit and implicit. Explicit costs are associated with the direct expenditure of funds. These are the costs of purchasing equipment, materials and labor in the relevant markets. Implicit costs are the costs of a firm's owned resources, such as land, equipment, and entrepreneurial talent. In other words, the economic concept of cost includes the foregone rent on land owned by the firm's owners, interest on capital invested in equipment, and the foregone wages of the firm's owners (if they are not paid as employees).

We need to know the dependence of costs on output volume in order to answer an important question in the following lectures: what volume of production will the company choose.

This relationship is described by a cost function. Based on it, it is easy to determine the fixed and variable, average and marginal costs of the company. We assume that the reader is familiar with these concepts from Lecture 3.

Suppose we are dealing with a company whose costs are presented in table. 1.

Table 1.

The company's costs in the short run

Production volume (Q), units/year Costs

constant (FC), thousand rub./year variable (VC), thousand rub./year total (TC), thousand rub./year limit (MC), thousand rub./unit average constant (AFC), thousand rub./unit average variables (AVC), thousand rub./unit average total (ATC), thousand rub./unit

01234567 5050505050505050 0365080104140196300 5086110130154190246350 -362420243656104 -50,025,016,712,510,08,37,1 -36,030,026,726,028,032,742,9 -86,055,043,338,538,041,050,0

From the cost indicators given in the second and third columns, it is easy to obtain all other cost characteristics. Total costs are the sum of fixed and variable costs. Marginal cost is the increment in cost caused by a unit increase in output. For example, if a company increases production volume from two to three units, then total costs will increase from 110 thousand to 130 thousand rubles, i.e. by 20 thousand rubles. We obtain average fixed costs by dividing fixed costs by production volume. Average variable and average total costs are calculated similarly.

How quickly costs rise with output depends on the nature of the production process and especially on the extent to which it is subject to diminishing returns of variable inputs. Suppose a firm produces with the help of two factors - capital and labor, the amount of capital employed is fixed in the short run, and the only variable factor is labor. To produce more output, a firm must hire more workers. Diminishing productivity of a variable factor means that the marginal product of labor decreases with each additional worker. How will the marginal cost per unit of output change? We know that marginal cost is equal to the change in variable costs as output increases by one unit. Let each unit of labor cost the firm the same wage (W). To increase output per unit, the firm needs additional DL units of labor. It follows that

MC = DVC/DQ = W(DL / DQ) The marginal product of labor (MPL) is the increment in output caused by a unit increase in the quantity of labor. Therefore, the additional amount of labor required to increase output by one unit is DL/DQ = 1/MPL. Hence MC = W / MPL.

Consequently, if the marginal product of labor decreases, then the marginal cost of production increases, and vice versa. Thus, the increase in marginal costs, which we observe, in particular, in Table. 1 is closely related to the law of diminishing returns of variable factors of production. Rice. 1. Curves of total (a), average and marginal (b) costs in the short period Assuming, as usual, the product is infinitely divisible, we can construct continuous cost curves that complement our discrete data on total, average and marginal costs. In Fig. 1 we see a set of curves we need. Since various cost characteristics are related to each other, the curves are not located randomly relative to each other (Fig. 1, b): 1) the marginal cost (MC) curve intersects the average total cost (ATC) curve at the point where average costs take the smallest value; 2) to the left of this point ATC > MC and average costs decrease with increasing Q; on the right ATS

Lecture 23. Costs

Company costs over the long term

In the long run, a firm can change the volume of all factors of production. She seeks to choose the best combination of them - the one that minimizes costs for a given volume of output. For example, over a long period, a firm can replace capital with labor, or, conversely, labor with capital, in order to arrive at the optimal combination of resources. We saw in the previous lecture that the optimum is achieved when the marginal rate of technical substitution is equal to the ratio of prices of resources (factors of production). Graphically, the optimal combination of resources in the production of a given volume of output is determined by the tangency point of the isoquant and isocost (see Lecture 22, Fig. 9).

We can now move on to consider long-run cost curves. Long-term costs are production costs provided that all factors are used in such a combination with each other that minimizes the total costs of production of a given volume of output. In Fig. Figure 1b shows a typical U-shaped curve of short-term average total costs. Let's consider the shape of the long-term average cost curve.

In the long run, the firm plans its capital investments and can choose the best level of production capacity. Consequently, in a long period, a firm is able to produce a given volume of output at lower costs than in a short period, when it is constrained by a given production capacity.

Suppose that a firm uses two factors of production: capital and labor. In Fig. Figure 2 shows its isoquants and growth line. Let the volume of capital used be fixed in the short period at the level K1. To produce Q1, the firm will choose L1 to use labor. The firm's short-run choice constraint is revealed if the firm decides to increase its output to Q2 (because the demand for its product has increased). In the short run, the amount of capital is fixed and the firm will not find anything better than to use L3 units of labor. In this case, the total production costs are given by the isocost A3B3; let's denote them TC3.

In the long run, the firm has more choice. It can increase the amount of capital employed so that it can be used in the best combination with labor (the combination that minimizes total costs). As we know, such a combination is determined by the tangency point of the isoquant and isocost. In this case (for production volume Q2) this is point E2. The costs specified by isocost A2B2 and equal to TC2 are less here than on isocost A3B3 (which lies higher)

Rice. 2. The best choice of a combination of resources in the short (E3) and long (E2) periods

What conclusions can we draw from this regarding the behavior of costs in the short and long periods? In Fig. 3a shows the same situation as in Fig. 2, but in different coordinates: the abscissa axis shows the product volumes, and the ordinate axis shows the total costs. It can be seen that at production volume Q1 the curves touch each other, and at other volumes the curve for the short period is higher. The average total costs presented in Fig. 1 are also correlated. 3, b. Rice. 4 shows the ratio of marginal costs for different periods.

Rice. 3. Curves of total (a) and average (b) costs in the short (STC, SAC) and long (LTС, LAC) periods.

Points E1-E3 correspond to the points in Fig. 2. Costs in the short period are greater than in the long period, for all volumes of product, except for the only one (Q1), where they coincide: for this volume, both variable and constant factors are best selected. For product volume Q1, the curves for the short and long periods touch each other, and for other volumes (for example, Q2), the curves for the short period are located higher than for the long period.

Rice. 4. Short-run (SMC) and long-run (LMC) marginal cost curves.

As can be seen from Fig. 3, a, with product volume Q1, the slopes of the tangents to the STC and LTC curves coincide; at point E1 both curves have a common tangent. This means that at Q = Q1 the marginal costs of the short and long periods coincide. To the left of E1 the STC curve is flatter, and to the right it is steeper than the LTC. This means that when Q Q1 is greater. So, at Q = Q1, the SMC and LMC curves intersect, and the slope of SMC is greater than LMC.

So, over a long period of time, an enterprise can change not only the volume of labor and materials used, but also the amount of production capacity. Suppose you decide to engage in passenger transportation between the village in which you live and the regional center. Depending on the demand for such services, you can provide them in the cheapest way, either using a car, a minibus, or a bus. In other words, your business may be small, medium or large in size. Each enterprise size is characterized by its own set of short-term average and marginal cost curves. For your enterprise they will look like in Fig. 5.

Rice. 5. Average and marginal cost curves for small, medium and large enterprises

If you intend to carry out passenger transportation in a volume not exceeding Q2, then the most economical option for your enterprise will be to use a passenger car. If you predict that the volume of demand for your services will be in the range of Q2 to Q4, then your best option is to have a minibus. Well, if the demand is even greater, then you need to buy a large bus.

Suppose that at first you were engaged in transportation in a passenger car - and that was enough. But you discovered that fellow villagers began to travel to the city more often and it makes sense for you to double transportation (from Q1 to Q3). In the short term, you can double the number of flights and your average cost per passenger will be C1. In the long term, you decide to enlarge your enterprise: after waiting for the car to wear out, you replace it with a minibus, or sell the car and buy a minibus, or, if you rented a car, do not renew the lease of the car, but rent a minibus. Your average cost per passenger is now C2 because it is determined by the SAC2 curve rather than the SAC1 curve.

Why does SAC2 lie below SAC1 when traffic volumes exceed Q2? Because by using a minibus, instead of making more trips in a passenger car, you save gasoline, your own labor and repair costs, since the physical wear and tear of the vehicle and the frequency of breakdowns are directly proportional to the mileage . However, if the number of passengers is less than Q2, using a minibus has a higher average cost than using a car, since you will be driving the minibus half empty and the higher cost of your capital will be attributable to less output.

Finally, if you intend to transport more than Q4, then you should get a larger bus, and your average costs will be determined by the curve. SAC3. It is easy to see that the long period average cost curve will be a curve covering the corresponding sections of the short period average cost curves. In Fig. 5 these areas are shown with a thick line.

Now let’s imagine that there are many more options for choosing the size of an enterprise (or the size of its production capacity) than three. The line enclosing, or “enveloping,” the short-term cost curves will become a smooth curve. In Fig. Figure 6 shows such a long-period average cost curve LAC. In this case, it is U-shaped. The downward portion of the curve, showing a decrease in average costs as production volume increases, corresponds to increasing returns to scale, and the upward portion of the curve, showing an increase in average costs as production volume increases, corresponds to diminishing returns to scale.

Rice. 6. Long-term average cost curve with increasing and decreasing returns to scale

Some industries are characterized by constant returns to scale. Our passenger transportation would be such an industry if, say, minibuses and buses did not exist, but you would have the opportunity to increase the volume of transportation by two or three times, increasing by two or three times the quantities of all factors of production. In other words, you can carry twice as many passengers by buying or renting another car, hiring another driver, and buying twice as much gas. The average cost curves for using one, two and three cars will look like SAC1, SAC2 and SAC3 in Fig. 7. Here it is assumed that the volume of production in the industry does not affect the prices of factors of production.

Rice. 7. An industry with constant returns to scale.

With constant returns to scale, costs are proportional to production volume: LTC = kQ. Therefore LAC = LMC.

The shape of long-run average cost curves varies across industries. In some industries, diminishing returns to scale come into force at “small” production volumes (Fig. 8a), in others, a wide range of production volumes is characterized by increasing returns to scale, and only at “very large” output volumes do returns to scale begin to decline ( Fig. 8, b). Of course, large or small output volumes are relative to market capacity, i.e., demand for industry products. Many industries are characterized by constant returns to scale of production within a wide range of changes in production volume, as in Fig. 8, c.

Rice. 8. Shapes of the long-term average cost curve

Lecture 23. Costs

Costs, returns to scale and market structure

Why do only four enterprises produce passenger cars in Russia, and dozens of furniture? Why, even in a large city, are there only a few bakery factories, but many manufacturers of cakes and pastries? Why is grain grown by thousands of independent farms, but turned into flour by dozens of flour mills? Economies of scale explain these differences.

In Fig. Figure 9 shows the impact of returns to scale on the number of firms in an industry. Let us first assume that the long-run average cost line is LAC1. In this case, average costs are minimal at output volume q1. This volume will be very small compared to the industry volume of demand Q* at price P*. Therefore, we can talk about perfect competition in the industry. The number of firms in the industry (N) will be quite large and equal to the ratio Q*/q1.

Rice. 9. Economies of scale and number of firms in the industry

Now suppose that the average cost curve has the form LAC2 and reaches a minimum at output q2. In this case, the quantity demanded at any price could be satisfied by a small number of firms. And consequently, an oligopolistic structure will develop in the industry.

Finally, assume that the average cost curve is LAC3, which reaches its minimum to the right of the demand line (D). Then there is a natural monopoly and there will be only one firm in the industry. Let us note in passing that the lines LAC1-LAC3 can also be considered as belonging to the same industry in different periods of its existence.

Demand, however, can also change: a shift in the demand line to the right or left will lead to a change in the number of firms in the industry with unchanged average costs.

Returning to the examples, we can say that a small number of car factories is determined by the fact that the minimum average cost of producing a car is achieved with relatively large production volumes, and a cake or pastry with relatively small ones. At the same time, the average costs for water and gas supply to city residents for one company are less than they would be for two or more companies. Therefore, monopolies dominate in almost all public services.

Thus, returns to scale play the role of a golden key that allows you to unlock the secret of the number of producers in any industry. Is it so? Let's turn to the facts and assessments, albeit related to the American economy (Table 2).

First, note that the theoretical estimate of the minimum efficient size is given at the individual plant level. There may be two or more of them in one company. Second, the four-firm concentration ratio shows the share of the four largest firms in total sales. In column 3 it is obtained by simply multiplying the values ​​of column 2 by four. Thus, if firms use only efficient size plants, then the values ​​in Column 3 show the minimum possible concentration in a given industry.

From a comparison of the actual concentration coefficient with the theoretical estimate, we can conclude that economies of scale at the plant level do not explain the real level of concentration in these industries.

Therefore, there are other factors that affect the degree of concentration. What are they? First, economies of scale at the firm level. It may turn out to be higher than at the enterprise level, for example, due to the centralization of individual functions (transport, advertising, acquisition of raw materials and semi-finished products).

table 2

Plant-level economies of scale and market concentration

Industry Minimum efficient plant size as a share of US consumption, % Concentration ratio for four firms

Theoretical minimum Valid in 1967

Ball and roller bearings 1.4 5.6 54

Brewing 3.4 13.6 40

Cement 1.7 6.8 29

Cigarettes 6.6 26.4 81

Products made of cotton and synthetic fabrics 0.2p 0.8 36

Glass containers 1.5 6.0 60

Paints 1.4 5.6 22

Oil refining 1.9 7.6 33

Refrigerators 14.1 56.4 73

Shoes 0.2 0.8 26

Batteries 1.9 7.6 61

Broadband steel 2.6 10.4 48

Source: Scherer F. M., Beckenstein A., Kaufer E., Murphey R. D. The Economics of Multi-Plant Operation: An International Comparisons Study. Cambridge (Mass.), 1975. Tab. 3.11. P. 80. Quoted. by: Dolan E. G. Basic Economics. Hinsdale (III.), 1980. P. 458.

Secondly, a company can produce several products simultaneously, reducing overall costs precisely due to their joint production (economies of diversity - economies of scope). Let's remember refrigerators and trucks with the same ZIL brand.

Thirdly, if the firm's average cost curve has the shape as in Fig. 8c, then we can speak with certainty only about the upper and lower limits of the number of firms: the maximum number of firms will be determined by the minimum effective size of the enterprise Q1, the minimum - by the maximum effective size Q2.

Finally, entry into the industry is not free. It is limited by patent and licensing rights, the existence of technological and technical secrets, inequality of conditions for the acquisition of resources and sales of products for existing and potential firms, as well as the stability of established customer preferences.

The combination of these factors (economies of scale at the plant and firm level, economies of variety, height of barriers to entry, magnitude of demand) determines the number of firms in a given industry and its market structure. The following lectures are devoted to the characteristics of market structures, as well as theories that provide an alternative explanation for the size of the company.

Lecture 23. Costs

Opportunity costs. From the history of economic thought

The concept of opportunity costs, or more precisely, opportunity cost, replaced the concept of real costs at the end of the last century. Interestingly, this concept was first applied to the so-called labor value. Let us refer to K. Rodbertus, who is considered one of the founders of “scientific socialism” and a theorist of labor value (cost).

“But goods,” wrote K. Rodbertus, “do not cost anything other than labor, or labor is the only element in the process of the emergence of goods that can be indicated in terms of their value. You just need to understand the concept of “cost” (kosten It contains more than a simple statement that in order to obtain one thing another is necessary. What is essential here is both that an expense has been made, which therefore can no longer be applied to another (emphasis added - V.G.), and that , that it comes from a subject affected by irreversible costs" (Rodbertus K. Towards the knowledge of our state-economic system. L., 1935. P. 63-64).

“Quite right!” exclaims E. Böhm-Bawerk, citing this extract from Rodbertus and then over the course of several pages (Böhm-Bawerk E. Capital and Profit. St. Petersburg, 1909. P. 428 et seq.) shows that the same principle - the impossibility of turning an expenditure once made into something else, its irreversibility - can be applied not only to the expenditure of labor, but also to the expenditure of any other resource.

The concept of opportunity costs was developed by one of the main representatives of the Austrian school, F. Wieser. It was first put forward by him in his report “On Costs and Value,” in which Wieser interpreted costs “as utility sacrificed.” It is presented more fully in his book “On the Origin and Basic Laws of Economic Activity” (Wieser F. Uber den Ursprung und die Hauptgesetze des Wirtschaftlichen Wertes. Wien, 1884. See also: Wieser F. Theory of Social Economy // Austrian School in Political Science economy. M., 1992. pp. 442-450).

In the Anglo-American literature, the term opportunity cost was introduced by the American economist D. Green in the article “Pain Cost and Opportunity Cost” (Green D. Pain Cost and Opportunity Coat // Quart. Journ. Econ. 1894. No. 1). Today this term has become almost international; it is also used in German economic literature.

The term opportunity cost is “very unlucky” when translating it into Russian. In some translated textbooks (McConnell K.R., Brew S.L. Economics. M., 1992; Pindyke R., Rubinfeld D. Microeconomics. M., 1992) it is transmitted as opportunity costs. However, imputed in English is imputed, and the concept of imputation (German Zurechnung), although it was also proposed by F. Wieser, refers to a completely different section of economic theories - the theory of income distribution (imputation) to factors of production. Apparently, such a translation is associated with an unfortunate mistake made in one of the most famous English-Russian economic dictionaries (English-Russian Economic Dictionary / Edited by A. V. Anikin. M., 1977. P. 167).

In others, this term was translated as the cost of lost opportunities, although in English miss, lose. For example: miss the opportunity - to lose, miss an opportunity, loses opportunity - losses due to non-use of an opportunity.

However, the economic entity makes its choice consciously. At the same time, as the theory suggests, he is guided by the principle of maximizing his objective function (utility, profit). He does not “miss out” on anything; he consciously rejects or rejects alternatives that are less valuable to him in order to achieve more valuable ones.

Therefore, the modern definition of opportunity cost is:

"Opportunity cost is the evaluation placed on the most highly valued of the rejected alternatives or opportunity" (The New Palgrave Dictionary of Economics. London, 1987. Vol. 3. P. 719). (Remember that rejected means rejected, rejected).

In Russian, the term opportunity cost is best conveyed as the cost (cost) of rejected opportunities, but more conveniently as an alternative cost (cost).

Lecture 23. Costs

Higher education: returns to scale

In a market economy, education as an industry and a university as a company, regardless of the form of ownership and subordination, cannot exist without cost assessment. Analysis of the cost structure of education is in the constant attention of economists and politicians in developed countries, since the bulk of students receive both school and higher education within the public sector, which entails significant budget expenses. Even where tuition is charged, it rarely exceeds 20% of total costs.

Thus, at the prestigious London School of Economics (LSE), tuition fees for a bachelor's degree in the 1990/91 academic year. year was 1675 f. Art. per year for students from the UK and the European Community and 5425 f.

Art. - for students from other countries. This amount represents only 35% of LSE's total income (and the bulk of this amount comes from students in the second category, which, of course, does not receive government subsidies; by the way, the share of subsidies - 34% of total income - is steadily declining). Since the LSE balance of 40 million pounds. Art. was reduced to a slight positive balance, it can be assumed that tuition fees cover only 34% of the cost of training (data given are taken from official LSE publications).

The purpose of our analysis in this section is the effect of increasing returns to scale of production, i.e., the total number of students studying at a given university. We will consider this problem at the model level, using international comparisons for interpretation.

Returns to scale are a real practice. So far we have studied the behavior of a firm that maximizes its profits. However, many organizations are not guided in their activities by the principle of making a profit. Such organizations are called non-profit, or non-profit. This does not mean, however, that they fall out of the market economy. Non-profit organizations usually have some independent sources of income, which are still insufficient to cover their costs. Thus, a non-profit organization can exist only if it receives subsidies from the outside - from the state, municipal authorities, firms or individuals. We will not consider here the question of why and to what extent such subsidies are provided. Let us only take it as self-evident that the one who provides the money has the right to an account of how it was spent. Thus, the question of cost effectiveness arises.

If the cost per unit of output decreases as output increases, then we speak of increasing returns to scale. We will show that this effect does occur in higher education. In order to give all economic terms and the problem under consideration a correct character, we must formulate a verbal (i.e., verbal, descriptive) model of a university.

Let's consider what a university is like as a company. The products of the university are primarily educational services. At the same time, we simplify the situation by considering the university as a purely educational enterprise; in fact, the university also produces scientific products.

In the case of the LSE, the science sector contributes 12% of total revenue; in technical and natural science universities this percentage can be significantly higher.

Thus, the university is a good candidate for single-product firms if we accept that all students are the same in terms of their resource expenditures. This is, of course, some kind of abstraction. First of all, there are ordinary students, there are graduate students, there are doctoral students, in addition, there is training in full-time, evening and correspondence forms - this is both a qualitative difference in the product and a difference in the cost structure. We, however, will assume for simplicity that the university educates only full-time students (this is typical, for example, of most Western universities).

Considering educational services to be the product of a university, we must measure its quantity by the volume of these services, i.e., by the number of students of all years of study. This understanding is consistent with most existing payment systems (each student pays for the next year or semester of education) and the principles of government funding.

In the short term, the costs of a university consist of fixed costs (payment for land, buildings, operating costs, salaries of administration and support staff, etc.) and variable costs (primarily the salary fund for teachers). Moreover, in practice, the salary fund for teachers depends on the number of students in a completely ambiguous way. Rent payments for buildings can relate to both fixed (if the university has a permanent lease agreement) and variable (if the university rents additional space due to an excess of students) costs. The same goes for operating costs. In the example below, we will make simplifying assumptions that allow us to isolate variable costs.

In Western universities, the share of teachers' salaries in the total university expenditure budget is 70-80%, which determines a high share of variable costs. In domestic universities, this figure fluctuates around 20% and tends to decrease (however, it should be taken into account that the budget of a Western university does not take into account the payment of scholarships and benefits to students; in our universities this figure is comparable to the salary fund of teachers).

Over the long term, a university may decide to change all components of its costs, including fixed ones. Changes in cost components result from changes in the quantities and proportions of resources used. The most important resource that determines the size of a university is the buildings and classrooms used for the educational process. In economic theory, each individual resource must be homogeneous. If we consider the educational areas of buildings as a homogeneous resource, then we will not be able to build an adequate model that reflects the actually observed process of returns to scale.

Let us consider what determines increasing returns to scale when a university decides to construct or reconstruct buildings. If such construction only allowed us to increase the number of students or improve study conditions (say, by equipping new laboratories), then we would hardly see cost savings per student. If we add another one of the same type to one building (doubling the resource), then we will simultaneously double both the maximum capacity of the university and all costs associated with payment and operation of buildings (we neglect one-time investments and subsequent increased depreciation charges for the new building) . In this case, we will not get any effect from increasing the scale.

The practice of Western countries after the student revolution of the late 1960s. shows a completely different approach to educational technology, leading to significant economies of scale. Most universities - both old and new - built modern complexes of educational buildings during this time. Their feature is the presence of large lecture halls. In France they resemble huge hangars from the outside; in Italy they are called amphitheatres. Such auditoriums accommodate 600-1000 people. At the same time, in Europe, technical teaching aids are not very common - at most a microphone is used. The presence of such classrooms allows you to have one lecturer for a stream of up to 1000 people. Compared to our traditional situation, when there are no classrooms for more than 100 people, we get a 10-fold saving in lecturer time. Further, the ratio of lectures/practical classes is irrevocably decided in favor of the former: classes in groups require many teachers and separate premises - both are expensive. In addition, the few practical classes are usually conducted not by permanent professors, but by graduate students or teachers (part-time) of lower qualifications and, therefore, having several times lower salaries. Thus, when moving to a different scale of the university, the entire technology of the educational process changes, providing cost savings per student. This is the effect of returns to scale.

So, we must consider (in our approximation) two qualitatively different resources - large audiences and small audiences. It is the emergence or increase in the share of the former that is responsible for the phenomenon of economies of scale in the higher education industry. The amount of another resource - teaching labor - strongly depends on the factor of large audiences, since the teaching load of an individual teacher cannot be increased. Fewer large classrooms - more teachers - more labor costs: this is the general logic.

Conditional example. The university has classrooms designed for no more than 50 students. The duration of study is 5 years, 200 students attend each year of study. When teaching, say, an introductory economics or mathematics course, all first-year students need four lecturers (or the same lecturer repeating the lectures several times; this difference is not significant for economic analysis). If the university had a classroom for 200 people, labor costs could be reduced fourfold. In the last years of study, the proportion of special courses taught to small groups of students is high, so the presence of large classrooms here will provide less savings. Let us assume, for simplicity, that in the first three courses only lectures are given, and in the senior years a large lecture hall is not needed at all.

Let the university decide to expand by building a special building with one lecture hall for 400 people. Now, with the same student body, we will be able to save money by giving lectures to a stream of 200 people. However, half the audience will remain empty. From the point of view of short-term costs (for the new scale of the company), it will be advisable to increase the student population to 400 people per course, if we assume that the classrooms of the old educational building are sufficient to conduct classes in senior courses with an increased student population. The scale of the university will increase from Q0 = 1000 students to Q1 = 2000 students. Let's also assume that the new building doubles fixed costs (in the new short period compared to the old short period).

Let's calculate the returns to scale. For the initial state of the university, we write down the usual relationship between total, fixed and variable costs:

TC0 = FC0 VC0.

Then the average total cost per student is

ATC0 = TC0/Q0 = TC0/1000.

In the new state after expansion, fixed costs have doubled: FC1 = 2FC0. To calculate the new variable costs (which we reduce here to the labor costs of teachers) and compare them with the old ones, we will use the natural assumption that in the initial state, the labor costs of teachers were evenly distributed over the years of study. In addition, we believe that the new lecture hall is sufficient to accommodate the flow of all three first years of study in one day (in developed countries, a lecture along with a break lasts one astronomical hour; even with three lecture hours a day from 9 a.m. to 6 p.m., we will miss all students ). In senior courses, where work with students is individual, we assume the worst - a double increase in the contingent leads to a double increase in labor costs. In this case, variable costs changed according to the following law:

VC0 = 1/3 3/5 VC0 2 2/5 VC0 = 19/20 VC0 "VC0.

ATC0 = FС0/1000 VС0/2000 = AFC0 AVC0,

then from here we get

ATC1 = TC1 / Q1 = TC1/2000 " FC0/1000 VC0/2000 = ATC0 - 1/2 VC0/1000 = ATC0 - 1/2 AVС0.

Thus, average costs were reduced by 50% of the original variable costs per student, which is a hefty amount.

Let us recall that variable costs are determined primarily by the salaries and classroom load of teachers. Since for full-time teachers, salary is not related to the number of classroom hours, variable costs over a period of time (say, one year) can be calculated using the formula

where W is the salary of one teacher for this period (for simplicity, we assume that the salary of all teachers is the same or take the average value); N - number of teachers. Salary is a constant parameter in our model, while the number of teachers varies depending on the number of students and the size of the classroom. From the approximate equality VC0 "VC1 it follows that the number of teachers before and after increasing the scale of the university remained the same (although, apparently, a structural restructuring was needed - fewer teachers teaching introductory and general courses, and more special ones).

The formula for ATC1 shows that returns to scale will only be noticeable if teachers' salaries are high enough—otherwise, the deductible will be negligible compared to fixed costs. In developed countries, the annual salary of a professor fluctuates mainly in the range from 40 thousand to 100 thousand dollars. As already indicated, this leads to AVC being superior to AFC. Therefore, the mechanism of returns to scale has significantly influenced the appearance of higher education in developed countries. In Russia, a similar mechanism cannot work now, since the cost of fixed assets and capital construction is already almost equal to the world level, and the annual income of a professor does not exceed 600 dollars. This means that the proportion of reduced AVC0 in the formula for ATC1 is approximately 100 times less than in developed countries.

Note that in the considered example, the student/teacher ratio approximately doubled, since the student population doubled, but the number of teachers remained the same.

By the way, it is the student/teacher ratio that is the most important economic indicator of the education system. Since the late 1980s. we have a movement to reduce this figure from 12 to the “university level” of 6 students per teacher.

What's abroad? Foreign practice is exactly the opposite.8 It is based on the following three premises:

The need to support a sufficiently high level of remuneration for professors, ensuring that they belong to the wealthy part of the middle class;

Inviolable academic freedoms, which determine a strict upper limit for a given country on a professor's classroom hours (usually no more than 6 hours per week, but often less);

The economies of scale described above. Abroad, even in expensive and prestigious universities where highly qualified specialists are trained, the student/teacher ratio is 20-30. In ordinary universities it reaches 50 and above. This is the only way such huge factory universities as the University of California, with up to 100 thousand students, can survive, and real students, not our part-time students. Having mentioned the University of California, it is appropriate to note that in its case there are two mechanisms of return to scale at work - the one described above and the traditional one associated with savings on management and infrastructure. This is explained by the fact that the university consists of nine campuses (the largest and most famous of them is Berkeley), each of which is quite autonomous (from the point of view of the general theory of the company, it is a company with nine plants). The first mechanism operates on each campus, and the traditional mechanism operates throughout the university as a whole.

At LSE in 1990/91 academic year. There were about 4,200 regular students (about 5,100 in total, including temporary and part-time students) and about 310 permanent faculty. This means that even in such an elite university, the student/teacher ratio is about 15 (it should be taken into account that the share of students studying in master's programs or writing a dissertation (postgraduate students) is about 40%; since the labor intensity of individual training at advanced level is high, these figures imply a very high actual ratio at the initial bachelor's level).

In practice, the problem of constructing new buildings to achieve a return to scale strategy comes down to the difficult problem of a one-time but significant investment. In Europe, such decisions were made by governments after the student revolution of 1968.

Receiving subsidies for the construction of a new building is an event for any university. As a rule, the building itself receives the name of the dean or other figure from the administration or board of trustees through whose efforts the money was obtained. Thus, at LSE, a 60% expansion of space occurred in 1978, when a new building was added next to the historical core. This new building was named Lionel Bobbins Building in honor of the famous British economist Lord Lionel Robbins, who owns the now textbook definition of economics as the science of the optimal distribution of limited resources. Lionel Robbins was the chairman of the board of the LSE, and it was his appeal for funds to purchase the building that was granted.

Lecture 23. Costs

1. a. Using the data from Problem 1 of Lecture 22, calculate the values ​​and construct a graph of the total costs of a short period, considering resource K fixed at the level of K = 45. Construct graphs of average and marginal costs.

b. Using the line you found; growth of the company, calculate the values ​​and plot the function of total costs for a long period. Draw graphs of average and marginal costs. Compare with the results of the previous paragraph.

2. a. The firm has some resource that it can use in one of two possible ways. The first method would bring the company an income of 100 den. units, the second - income 150 den. units Determine the costs incurred by the company for each method of using the resource.

b. How will the answer change if a third way of using the resource arises, generating an income of 120 den. units?

3. Can the STC line not have a single point in common with the LTC line? If yes, what could be the reason for this?

Costs can be viewed from different perspectives. If they are studied from the perspective of an individual company (individual manufacturer), we are talking about private costs. If costs are analyzed from the perspective of society as a whole, then external effects arise and, as a consequence, the need to take into account social costs.

Let us clarify the concept of external effects. In market conditions, a special purchase and sale relationship arises between the seller and the buyer. At the same time, relationships arise that are not mediated by the commodity form, but have a direct impact on people’s well-being (positive and negative external effects). An example of positive external effects is expenses for R&D or training of specialists; an example of a negative external effect is compensation for damage from environmental pollution.

Social and private costs coincide only in the absence of external effects, or under the condition that their total effect is equal to zero.

Social costs = Private costs + External costs

Fixed variable and total costs:

Fixed costs - eh?? This type of cost that an enterprise incurs within one production cycle. It is appropriate to note what is determined by the enterprise independently. All these costs will be typical for all product production cycles. Variable costs - eh?? These types of costs are transferred to the finished product in full. Total costs are those costs incurred by the enterprise during one stage of production.

General = Constants + Variables

Opportunity costs:

Accounting costs - eh?? the cost of the resources used by the company in the actual prices of their acquisition.

Accounting costs = Explicit costs

Economic costs - eh?? the cost of other benefits (goods and services) that could be obtained with the most profitable possible alternative use of these resources.

Opportunity (economic) costs = Explicit costs + Implicit costs.

These two types of costs (accounting and economic) may or may not coincide with each other.

If resources are purchased on a free competitive market, then the existing actual equilibrium market price paid for their acquisition is the price of the best alternative (if this were not so, then the resource would go to another buyer).

If resource prices are not equal to equilibrium due to market imperfections or government intervention, then actual prices may not reflect the cost of the best rejected alternative and may be higher or lower than opportunity costs.

Explicit and implicit costs.

From the division of costs into the two types considered, alternative and accounting, a classification of costs into explicit and implicit follows.

Explicit costs are determined by the amount of enterprise expenses for paying for external resources, i.e. resources not owned by the firm. For example, raw materials, materials, fuel, labor, etc.

Implicit costs are determined by the cost of internal resources, i.e. resources owned by the firm.

An example of an implicit cost for an entrepreneur would be the salary that he could receive as an employee. It is worth saying that for the owner of capital property (machinery, equipment, buildings, etc.), previously incurred expenses for its acquisition cannot be attributed to the obvious costs of the present period. In this case, the owner incurs implicit costs, since he could sell the e?? put the property and proceeds into the bank at interest, or rent it out to a third party and receive income.

Implicit costs, which are part of economic costs, should always be taken into account when making current decisions.

Explicit costs - eh?? opportunity costs, which take the form of cash payments to suppliers of factors of production and intermediate goods.

Explicit costs include:

• - wages to workers;
• - cash costs for the purchase and rental of machines, equipment, buildings, structures;
• - payment of transportation costs;
• - communal payments;
• - payment to suppliers of material resources;
• - payment for services of banks and insurance companies.

Implicit costs - eh?? opportunity costs of using resources owned by the firm itself, i.e. unpaid expenses.

Implicit costs can be represented as:

• - cash payments that the company could receive if it used its resources more profitably;
• - for the owner of capital, implicit costs will be the profit that he could have received by investing his capital not in this, but in some other business (enterprise).

Refundable and sunk costs.

Sunk costs are considered in a broad and narrow sense.

In a broad sense, sunk costs include those expenses that a company cannot return even if it ceases its activities (for example, costs of registering a company and obtaining a license, preparing an advertising sign or company name on the wall of a building, making seals, etc. .). Sunk costs will be like the firm's payment for entering or leaving the market.

In the narrow sense of the word, sunk costs - eh?? costs of those types of resources that have no alternative use. For example, the costs of specialized equipment manufactured to order from the company. Since the equipment has no alternative use, its opportunity cost is zero.

Sunk costs are not included in opportunity costs and do not influence the firm's current decisions.

Fixed costs.

In the short run, some resources remain unchanged, while others change to increase or decrease total output.

Thus, short-term economic costs are divided into fixed and variable costs. In the long run, this division becomes meaningless, since all costs can change (that is, they will be variable).

Fixed costs - eh?? costs (FC) that do not depend in the short run on how much the firm produces.

It is worth noting that they represent the costs of its constant factors of production.

Fixed costs include:

• - payment of interest on bank loans;
• - depreciation deductions;
• - payment of interest on bonds;
• - salary of management personnel;
• - rent;
• - insurance payments.

Variable costs VC are costs that depend on the firm's output. It is worth noting that they represent the costs of the firm's variable factors of production.

Variable costs include:

• - wage;
• - fare;
• - electricity costs;
• - costs of raw materials and materials.

The graph shows that the wavy line representing variable costs rises with increasing production volume.

This means that as production increases, variable costs increase:

• - at first they grow in proportion to the change in production volume (until reaching point A);
• - then savings in variable costs are achieved during mass production, and their growth rate decreases (until point B is reached);
• - the third period, reflecting changes in variable costs (movement to the right from point B), is characterized by an increase in variable costs due to a violation of the optimal size of the enterprise.

Distance Education Center

Department of Economics

Coursework on the topic:

"Product cost"

Completed st.gr.Z-0107:

Perminov V.S.

Checked by the teacher:

Rogulina T.A.

Seversk 2003

Introduction 3

1. The concept of product cost and its analysis. 4

2. Methods of cost accounting and cost calculation. 7

2.1 Normative method. 8

2.2 Custom method. 9

2.3 Process method. 14

2.4 Transverse method. 18

3. Planning of production costs. 22

4. Reducing production costs. 26

5. Calculation part 34

Conclusion 38

Introduction.

In a modern, rapidly changing environment of transition to a market, enterprise management needs to constantly analyze the company’s activities in order to make management decisions. For analysis and decision-making, initial information is required; such information is obtained from a number of economic indicators - one of which is cost. This indicator is one of the most important.

The main tasks of economic development at the present stage are to fully increase production efficiency, as well as to occupy sustainable positions for enterprises in the domestic and international markets. In order to withstand intense competition and win the trust of customers, an enterprise must stand out favorably against the background of enterprises of the same type. It is well known that the buyer is interested in the quality of the product and its price. The higher the quality and lower the price, the better and more profitable for the buyer. These indicators are precisely contained in the cost of production.

Cost is the basis for determining product prices. Systematic reduction of the cost of industrial products is one of the main conditions for increasing the efficiency of industrial production. It has a direct impact on the amount of profit and the level of profitability.

Therefore, the formation of production and distribution costs and their accounting are important for the entrepreneurial activities of organizations. The purpose of this work is to consider methods for calculating costs, as well as how to plan costs and reduce costs that are included in costs.

1. The concept of cost and its analysis.

In Russian legislation, cost is defined as the valuation of natural resources, raw materials, fuel, materials, energy, fixed assets, labor resources used in the production process of products (works, services), as well as other costs for its production and sale.

Obtaining the greatest effect at the lowest cost, saving labor, material and financial resources depend on how the enterprise solves the issues of reducing production costs.

Identification of reserves for cost reduction should be based on a comprehensive technical and economic analysis of the enterprise: study of the technical and organizational level of production, use of production facilities and fixed assets, raw materials, labor, economic relations.

The costs of living and embodied labor in the production process constitute production costs. In the conditions of commodity-money relations and the economic isolation of the enterprise, differences inevitably remain between the social costs of production and the costs of the enterprise. Social production costs are the totality of living and materialized labor, which is expressed in the cost of production. The costs of an enterprise consist of the entire amount of expenses of the enterprise for the production of products and their sale. These costs, expressed in monetary terms, are called prime costs and are part of the cost of the product. It includes the cost of raw materials, materials, fuel, electricity and other labor items, depreciation charges, wages of production personnel and other cash expenses. Reducing production costs means saving material and living labor and is the most important factor in increasing production efficiency and increasing savings.

The largest share of the costs of industrial production falls on raw materials and basic materials, followed by wages and depreciation.

The cost of production is interconnected with production efficiency indicators. It reflects most of the cost of products and depends on changes in the conditions of production and sale of products. Technical and economic factors of production have a significant impact on the level of costs. This influence manifests itself depending on changes in technology, technology, organization of production, in the structure and quality of products and on the amount of costs for its production. Cost analysis, as a rule, is carried out systematically throughout the year in order to identify internal production reserves for their reduction.

To analyze the level and dynamics of changes in the cost of products, a number of indicators are used. These include: production cost estimates, cost of commercial and sold products, reduction in the cost of comparable commercial products and costs per ruble of commercial (sold) products.

The production cost estimate is the most general indicator that reflects the entire amount of an enterprise's expenses for its production activities in the context of economic elements. It reflects: firstly, all expenses of main and auxiliary production associated with the production of commercial and gross output; secondly, the costs of works and services of a non-industrial nature (construction and installation, transport, research and design, etc.); thirdly, the costs of mastering the production of new products, regardless of the source of their reimbursement. These expenses are calculated, as a rule, without taking into account intra-factory turnover.

To analyze the level of cost at different enterprises or its dynamics over different periods of time, production costs must be reduced to the same volume. The cost of a unit of production (costing) shows the enterprise’s costs for the production and sale of a specific type of product per one natural unit. Costing is widely used in pricing, cost accounting, planning and benchmarking.

The indicator of reduction in the cost of comparable commercial products is used to analyze changes in cost over time with a comparable volume and structure of commercial products at those enterprises that have a stable range of products over time. Comparable products are understood as products that were mass-produced or mass-produced in the previous year. This also includes partially modernized products, if these changes did not lead to the introduction of new models, standards and technical conditions.

The cost of one ruble of commercial (sold) products is the most well-known generalizing indicator in practice, which reflects the cost of a unit of production in monetary terms impersonally, without distinguishing it by specific types. It is widely used in the analysis of cost reduction and allows, in particular, to characterize the level and dynamics of production costs in the industry as a whole.

Other cost indicators encountered in practice can be divided according to the following criteria:

According to the composition of the expenses taken into account - workshop, production, full cost;

According to the duration of the billing period - monthly, quarterly, annual, for a number of years;

According to the nature of the data reflecting the billing period - actual (reporting), planned, normative, design (estimated), forecasted;

According to the scale of the object covered - workshop, enterprise, group of enterprises, industry, industry, etc.

2. Methods of cost accounting and costing

Product cost is one of the main indicators of enterprise performance. Calculation of the unit cost of individual types of products, works or services and all commercial products is called costing. There are planned, normative and reporting (or actual) calculations.

Planned costing determines the average cost of products or work performed for the planning period (year, quarter). They are made up of progressive norms for the consumption of raw materials, supplies, fuel, energy, labor costs, use of equipment and cost norms for organizing production maintenance. These expenditure rates are average for the planning period. A type of planned calculations are estimated calculations, which are made for one-time products or determine prices, settlements with customers and other purposes.

Standard calculations are based on the rates of consumption of raw materials, materials and other costs in effect at the beginning of the year, month, and other costs (current cost rates). Current cost standards correspond to the production capacity of the enterprise at this stage of its operation. Current cost rates at the beginning of the year are, as a rule, higher than the average cost rates included in the planned costing, and at the end of the year, on the contrary, they are lower. Therefore, the standard cost of production at the beginning of the year is, as a rule, higher, and at the end of the year - lower.

Reporting or actual calculations are based on data from an accounting report on the actual costs of production and reflect the actual cost of products manufactured or work performed. The actual cost of production also includes non-planned non-production expenses.

Calculation of the cost of manufactured products is carried out using various methods. The costing method is understood as a system of techniques used to calculate the cost of a costing unit. The choice of method for calculating the cost of production depends on the type of production, its complexity, the presence of work in progress, the duration of the production cycle, and the range of products produced.

Industrial enterprises use standard, order-by-order, incremental, process-by-process (simple) methods of cost accounting and calculating the actual cost of products.

2.1 Normative method.

The standard method of accounting for production costs or calculating the cost of production is used, as a rule, in manufacturing industries with mass and serial production of diverse and complex products.

Its essence is as follows: certain types of production costs are taken into account according to current standards provided for by standard calculations; separately keep operational records of deviations of actual costs from current standards, indicating the place of occurrence of deviations, the causes and culprits of their formation; take into account changes made to current cost standards as a result of the implementation of organizational and technical measures, and determine the impact of these changes on the cost of production. The actual cost of production is determined by the algebraic addition of the sum of costs according to current standards, the magnitude of deviations from the norms and the magnitude of changes in norms:

Z f = Z n + O + I,

Where: Zf - actual costs;

Zn - standard costs;

O - the magnitude of deviations from the norm;

I is the magnitude of changes in norms.

In this case, the actual cost of the product can be established in two ways. If the object of accounting for production costs is certain types of products, then deviations from the norms, as well as their changes, can be attributed to these types of products directly. The actual cost of these types of products is determined by direct calculation using the given formula.

If the subject of the production cost account is a group of homogeneous types of products, then the actual cost of each type of product is established by distributing deviations from norms and changes in norms in proportion to the standard costs of producing individual types of products.

The application of the standard method of accounting for production costs and calculating the cost of production requires the development of standard calculations based on the basic cost norms in force at the beginning of the month and quarterly cost estimates for production maintenance and management. At enterprises characterized by the relative stability of technological processes, cost standards rarely change, so the planned cost differs little from the standard cost. At these enterprises, instead of standard calculations, planned ones can be used.

Deviations of actual costs from established standards for individual expenses are determined by the documentation method or the inventory method.

Current accounting of costs according to standards and deviations from them is carried out, as a rule, only for direct costs (raw materials, wages). Deviations for indirect costs are distributed between types of products at the end of the month. Analytical accounting of production costs is carried out in cards or special kind of turnover sheets compiled for individual types or groups of products.

2.2 Custom method.

The order-by-order method of accounting for production costs accumulates costs for individual works, contracts and orders. This costing method is used when products are produced in separate batches or series or when they are manufactured in accordance with the technical specifications of customers. With this method, the object of accounting and costing is a separate production order. An order means a product, small series of identical products, or repair, installation and experimental work. When manufacturing large products with a long production process, orders are issued not for the product as a whole, but for its units, assemblies, representing completed structures.

Job order costing is widely used by order-based manufacturers in areas such as printing, aviation, construction, auto repair, and professional services.

In order to record various production costs for accounting for work in progress, a costing sheet for orders and types of work is used. For each order, a separate statement is created that accumulates the direct materials, direct labor, and factory overhead costs assigned to that order as it moves through the production process. Depending on the needs of the company, the form of the statement may be different.

Now let's look at the accumulation of costs. In job-by-order costing, costs are tracked as follows. Direct materials and direct labor are allocated directly to a specific job; costs that are not directly traceable, such as factory overhead, are allocated to individual jobs using a given overhead rate (allocation).

The use of the allocated overhead rate is necessary when there are seasonal fluctuations in business activity, then it is possible to derive scores that are close in value to the unit cost indicators. If we apply actual overhead costs, then due to the seasonal nature of business activity, monthly unit cost indicators may turn out to be distorted.

It is not logical that the same product is charged at one factory overhead rate one month and another at a different rate the next month. This difference in overhead rates does not reflect monthly, normal production conditions. The average monthly cost rate based on annual production more accurately reflects the typical relationship between total plant overhead and production volume than actual monthly rates.

The degree of product completion used to determine the factory overhead rate varies among different functional departments. It depends on what type of costs most corresponds to reality in a given production and what the associated cost dynamics are. In one department, to determine the utilization rate, it is advisable to proceed from direct labor costs in man-hours; in another, it makes sense to rely on the indicator in machine hours as the most typical for a given production. Comparing the allocated overhead costs with the actual ones allows you to determine in which cases during the year too little overhead costs were attributed to production costs (underabsorbed overhead costs), and in which too much (excessively absorbed factory costs).

At the end of the year, the difference between the actual overhead costs allocated and the allocated overhead costs, if it exists and is immaterial, is exhausted in cost of goods sold. If this difference is significant, then the costs of work in progress, the cost of finished and sold products at the end of the year are adjusted, respectively, in units of production or monetary units, in proportion to the size of the deviation of actual overhead costs from the allocated ones.

Typical journal entries when accounting for order-by-order costing transactions are as follows:

Attribute direct costs and direct labor to product order “A”

Assign factory overhead to work in process for product order “A”

Record actual overhead costs for order “A”

Move processed items to order “A”

Record the sale of finished products for order “A”

Here you need to pay attention to the characteristics of production capacity.

The term power means “degree of containment,” “upper limit.” Shortages of machine time, materials, etc. can have a decisive effect on limiting production and sales. The administration, for the purposes of ongoing planning and control, sets the upper limit of the enterprise's capacity, taking into account technical and economic factors. Usually it is the administration, and not external factors, that determines the upper limit of production capacity. In determining production capacity limits, management considers its own decisions regarding the acquisition of property, plant and equipment. In turn, managers, having studied the possible effect of these capital expenditures in conducting business operations for years to come, prepare decisions on machines and equipment.

It is very important to find out the various characteristics (denominator) of production capacity, since this affects the assessment of planned indicators and the determination of performance results. This is also reflected in the overabsorption and underabsorption of factory overheads.

Production capacity is the ability to produce a product within a given period of time. Its upper limit is determined by the availability of premises, equipment, labor, materials and capital. Production capacity can be expressed in units of output, monetary units, labor costs, etc. There are four main levels of production capacity:

Theoretical - represents the volume of business operations that can be achieved under ideal operating conditions with the minimum possible negative result. This is the maximum possible output, also called ideal, nameplate or maximum production capacity;

Practical - this is the highest level of production that is achieved by the enterprise while maintaining an acceptable degree of efficiency, taking into account the inevitable losses of production time (vacations, weekends and holidays, equipment repairs), also called the maximum practical production capacity;

Normal - production capacity, which represents the average level of economic activity achieved to satisfy the demand for goods and services produced by the enterprise over a number of years, taking into account seasonal and cyclical fluctuations in demand, trends in its growth or reduction.

Expected annual production volume. This concept is close to normal production capacity, but with the difference that it is limited to one specific year. This characteristic is also called planned production capacity.

Depending on what level of production capacity is chosen to determine the factory overhead rate will determine the potential long-term effect on over- and underabsorption of overhead costs.

It may also be noted that standard costing can be used in combination with job order costing. Standard costing is a tool that can complement job-order costing. Order-by-order costing is used when certain costs are provided for one composite unit of production, or a small batch of independent products. Product units are customized according to the specific requirements of customers. Establishing standard costs can be useful in making preliminary calculations for direct materials, standard factory overhead, and direct labor required to complete each order. This is understandable, because this combination allows you to really assess the degree of risk in production, simplify the life of a manager and accountant, and reduce time spent when analyzing the final results of an enterprise’s activities over a certain period of time.

2.3 Process method.

Now let's consider another system, one in which production costs are accumulated for identical production products. A company may use process costing for some production products, and custom costing for others. In process costing, production costs are grouped by department or production process. Total production costs are accumulated under two main headings - direct materials and conversion costs (the sum of direct labor costs and factory overheads allocated to the cost of finished products). Unit cost is obtained by dividing the total cost attributable to a cost center by the production volume of that cost center. In this sense, the unit cost is an average indicator. Process costing is convenient for those companies that produce a continuous mass of identical products through a series of operations or processes. In general, process costing is used in industries such as oil, coal, chemical, textile, paper, etc.

Since the unit cost in process-based costing is an average indicator, the process-based accounting system also requires fewer business transactions than the order-based system. This is why many companies prefer to use process-based costing. In any case, before settling on a specific system, it is necessary to understand the fundamental features of each system in a broader sense. Typically, the choice of a particular costing method depends largely on the characteristics of the production process and the types of products produced. If this is a product of the same type, it moves from one technological site to another in a continuous flow, the method of process-by-process costing is preferable. However, if the costs of producing different types of products differ significantly from each other, then the use of process costing will not be able to provide the manufacturer with adequate information, so it is more appropriate to use the order costing method.

Some companies may find it necessary to implement a mixed use of these two systems, based on the nature of the movement of products through production workshops, for example, in conditions of parallel technological processes.

The most suitable for process costing are enterprises that have the following features:

Product quality is uniform;

An individual order does not affect the production process as a whole;

Fulfillment of buyer orders is ensured on the basis of manufacturer's reserves;

Production is mass-produced and carried out in-line;

Standardization of technological processes and production products is applied;

The demand for manufactured products is constant;

Controlling costs by production unit is more appropriate than accounting based on customer requirements or product characteristics;

Quality standards are checked at the level of production units; for example, technical control is carried out at the level of production units directly on the line during the production process;

There are three different ways to organize the movement of products associated with process costing:

Sequential movement;

Parallel movement;

Selective movement;

In sequential movement, each product undergoes the same series of operations. In the textile industry, for example, a factory usually has a spinning department and a dyeing department. Yarn from the spinning shop goes to the dyeing shop and then to the finished product warehouse. The way products are moved here is sequential.

With parallel movement, individual types of work are performed simultaneously, and then in a certain process they converge into a single chain. For those types of work that are carried out simultaneously, it may be necessary to use custom-type costing to take into account differences in costs for the simultaneous implementation of various types of work. This scheme is used in the production of canned food products. Thus, when producing fruit mixtures, different types of fruit are peeled and processed simultaneously in different production areas. After this, at the final stages of processing and canning, they are mixed and sent to the finished product warehouse.

During selective movement, products pass through technological rows of in-plant departments, each of which is built in accordance with the requirements for the final product. Meat processing and oil refineries fall into this category. During meat processing, for example, part of the meat after slaughter goes to the meat grinder and packaging, and then to the finished product warehouse. At the same time, the other part is smoked, then packaged and sent to the warehouse. This method can be used in a variety of forms.

Cost accounting using the process costing method contains four main operations:

Summation of material units of production moving in a flow. At the first stage, the sum of units of products processed in a given department during the reporting period is determined. In this case, the inlet volume must be equal to the outlet volume. This stage allows you to identify units of production lost during the production process. Interdependence can be expressed by the formula:
Z pr +I=Z kp +T
where: Z pr - initial reserves;

I - quantity of products at the beginning of the period;

Z kp - inventories at the end of the period;

T is the number of units of completed and transferred products;

Determination of output products in equivalent units. In order to identify the unit cost in a multi-process production environment, it is important to establish the full amount of work performed during the reporting period. In manufacturing industries, there is a specific reason related to how to account for production still in progress, i.e., work at the end of the reporting period that was partially completed. For the purposes of process costing, units of partially completed output are measured on the basis of full unit equivalents. Equivalent units are a measure of how many complete units are equal to the number of fully completed units plus the number of partially completed units. For example, 100 units of a product with a 60% completion rate are, in terms of production costs, equivalent to 60 fully completed units;

Determination of the total costs taken into account and calculation of the unit cost per equivalent unit. At this stage, the total costs allocated to the production unit in the reporting period are summed up. The unit cost per equivalent will be:
U s = P z / E p,
where Us is the unit cost, P z is the total costs for the period of time, E p is the equivalent units of production for the period of time;

For process-by-process costing, the so-called summary statement of production costs is used. It summarizes both total costs and unit costs allocated to a particular department, and contains the distribution of total costs between work-in-process inventories and units of completed and transferred (or product inventories) products.

The production cost summary sheet covers all four stages of costing and serves as the source for monthly journal entries. This is a convenient procedure in which cost data is reported to management.

2.4 Transmission method of cost accounting.

It is applicable if raw materials go through several complete stages of processing, and after the end of each stage, the result is not a product, but a semi-finished product. Semi-finished products can be used both in-house and sold externally. The costs of work in progress balances are distributed according to the planned cost of a certain stage of the production process.

The incremental method of cost accounting and calculating product costs can be:

Non-semi-finished products - control over the movement of semi-finished products is carried out by the accountant promptly in physical quantities and without recording on accounts.

Semi-finished - the cost is calculated for each stage of production of the product.

When inventory or work in progress remains at the beginning of a period, the output completed in the production process is made up of various receipts, partly from partially completed production of the previous period, and partly from units of new production begun in the current period. Since costs can change from period to period, each receipt may change at unit cost. The cost of opening inventory can be recorded in three ways: the weighted average method, the first-in-first-out method (abbreviated FIFO), and the last-in-first-out method (abbreviated LIFO).

Weighted average method. With the weighted average estimating method, the costs of work in progress at the beginning of the period are combined with the costs of production started in a given period, and from this the average cost is determined. When determining unit equivalence, differences in costs between production partially completed in the previous period and units started and completed in the current period are not taken into account. For fully completed production there is only one cost indicator.

The equivalent units in the weighted average method are determined as follows:

E zp + S z *N kp = E unit

Where: E ed - equivalent units;

FIFO method. The first-in, first-out method separates the cost of work in progress from the incremental costs charged to the current period. For the period, two types of unit costs are taken into account:

Completed units of work in progress at the beginning of the period;

Units of production whose production was started and completed in the current period.

Under this method, work in progress is expected to be completed first. The equivalent units in the FIFO method are determined as follows:

E ed =E sp +N kp *S s -N np *S s where: E ed - equivalent units;

E зп - units of completed production;

N kp - work in progress at the end of the period;

N np - work in progress at the beginning of the period;

C z - degree of completion as a percentage.

As for the LIFO method, its essence lies in the fact that the receipt of inventories into production is estimated at the cost of the most recent purchases, and the cost of inventories at the end of the period is determined based on the cost of the earliest purchases. This method allows you to more accurately determine the cost of goods sold and net profit from sales, however, it distorts the cost of inventories at the end of the period, but unlike the FIFO method, it provides a link between current income and expenses and allows you to smooth out the impact of inflation. It is also clear that the profit reflected by the enterprise in its financial statements is underestimated.

Now let's talk about using manufacturing cost data. A process costing system, like a job order costing system, is a cost accumulation system that provides an indicator of production costs per unit of output for a given technological process. Unit cost accounting is used primarily in calculating product costs, valuing inventory, and determining profitability. Data on unit costs are essential when setting prices for manufactured products. They are used not only in determining the price of the final product, but also in choosing the “right” composition of products in order to ensure maximum profit, as well as in determining ways to achieve maximum production volume. Perhaps the most effective use of production cost data is when the firm uses it in a standard costing system. Combined with standard costing, manufacturing cost data provides management with the basis to view the cost characteristics of the manufacturing unit as a cost center for all categories, such as direct materials, direct labor, and overhead. An increase in any of these cost components gives a signal to the administration about problems in the production activities of the unit.

Production cost data also helps management in making production decisions. In conditions of multi-product and joint production, enterprise management is often faced with a choice: whether to sell the product at the “point of separation of production costs” (the fork in production, after which jointly produced products become individually distinguishable) or to continue its further processing. When preparing external reporting, management can use production cost data (whether total or unit costs) to allocate joint production costs to different jointly produced products, allowing the production of financial performance statements for individual products.

3.Planning of production costs.

The main goal of cost planning is to identify and use existing reserves for reducing production costs and increasing on-farm savings. By reducing production costs as a result of saving past and living labor, industry achieves, along with the growth of savings, an increase in the volume of output. Cost plans should be based on progressive standards for labor costs, equipment use, consumption of raw materials, materials, fuel and energy, taking into account the best practices of other enterprises. Only with scientifically organized cost rationing can reserves for further reduction in production costs be identified and used.

The planned cost is determined by technical and economic calculations of the cost of production and sales of all commercial products and each type of product. Depending on the nature of production, a number of indicators are used to characterize the cost of production.

When producing one type of product, the cost per unit of this product is an indicator of the level and dynamics of costs for its production. To characterize the cost of dissimilar products, plans and reports use indicators of reducing the cost of comparable commercial products and costs per 1 ruble. commercial products. The enterprise plan also contains a summary estimate of production costs and planned cost estimates for individual products.

The cost indicator for 1 ruble of commercial products is determined based on the level of costs for the production of commercial products in relation to the cost of products in wholesale prices of the enterprise.

Cost indicator per 1 rub. of commercial products not only characterizes the planned level of cost reduction, but also determines the level of profitability of commercial products. Its value depends both on the reduction in production costs and on changes in wholesale prices, assortment and quality of products.

In the plan, costs are calculated for the planned volume and range of products, but the actual range of products may differ from the planned one. Therefore, the planned cost target for 1 rub. products are recalculated to the actual assortment and then compared with data on costs per 1 ruble. products.

The plan for the cost of industrial products is drawn up according to the rules uniform for all enterprises, established in the instructions for planning, accounting and calculating the cost of industrial products. These instructions contain a list of costs included in the cost of production and define methods for calculating costs.

The establishment of general rules that are uniform for all enterprises is important for proper planning and accounting of product costs. In particular, common to all industries is the procedure for including in the cost of production only those costs that are directly or indirectly related to the production of products. Therefore, it is impossible to include in the planned cost of production expenses that are not related to the production of products, for example, expenses associated with servicing the household needs of the enterprise (maintenance of housing and communal services, expenses of other non-industrial enterprises, etc.), major repairs and construction and installation work , as well as cultural and household expenses.

Some expenses, although taken into account in the actual production costs, however, due to their special nature, also cannot be included in the planned cost of production. Such costs include various types of non-productive expenses and losses, for example, production defects caused by deviations from the established technological process (losses from defects are planned only in foundry, thermal, vacuum, glass, optical, ceramic and canning industries, as well as in particularly complex production of the latest equipment in minimum sizes according to the standards established by a higher organization).

In terms of the cost of production at the enterprise, along with the costs of 1 rub. of commercial products there are the following indicators: the cost of individual types of products, the cost of commercial products, reduction in the cost of comparable products.

Determining the planned cost of individual types of products serves as the basis for planning production costs. The planned cost of all commercial products is calculated based on data on the volume of commercial output and the planned cost of individual types of products.

Assessment of plan implementation at the cost of all marketable products is carried out taking into account changes in prices for materials and tariffs for transportation and energy that occurred during the reporting year.

When planning and cost accounting at enterprises, all commercial products are divided into comparable and incomparable. Comparable products are considered to be products produced in the previous year (in relation to the planned year), as well as products with a long production cycle that were produced last year in single copies. Comparable products do not include work on external orders, services provided to internal capital construction, major repair work and products manufactured on a trial basis. Incomparable products include products mastered by production in the current year.

The enterprise plan defines a task to reduce the cost of comparable products. It is expressed as a percentage reduction in production costs compared to the previous year. Along with this, the amount of planned savings as a result of reducing the cost of comparable products can also be indicated.

To determine the task of reducing the cost of comparable commercial products, a cost calculation is made for the entire range of products based on the volume of production provided for by the enterprise plan and taking into account the planned cost level per 1 ruble. commercial products at wholesale prices.

4. Reducing production costs.

The decisive condition for reducing costs is continuous technical progress. The introduction of new technology, comprehensive mechanization and automation of production processes, improvement of technology, and the introduction of advanced types of materials can significantly reduce the cost of production.

A serious reserve for reducing production costs is the expansion of specialization and cooperation. In specialized enterprises with mass production, the cost of production is significantly lower than in enterprises producing the same products in small quantities. The development of specialization requires the establishment of the most rational cooperative ties between enterprises.

Reducing production costs is achieved primarily by increasing labor productivity. With an increase in labor productivity, labor costs per unit of production are reduced, and consequently, the share of wages in the cost structure decreases.

The success of the struggle to reduce costs is determined primarily by the increase in worker productivity, which, under certain conditions, ensures savings on wages. Let us consider under what conditions, with an increase in labor productivity at enterprises, the cost of workers' wages decreases. An increase in output per worker can be achieved through the implementation of organizational and technical measures, due to which, as a rule, production standards and, accordingly, prices for work performed change. An increase in output can also occur due to exceeding established production standards without carrying out organizational and technical measures. Production standards and prices in these conditions, as a rule, do not change.

In the first case, when production standards and prices change, the enterprise receives savings on workers' wages. This is explained by the fact that due to a decrease in prices, the share of wages in the cost of a unit of production decreases. However, this does not lead to a decrease in the average wages of workers, since the given organizational and technical measures enable workers to produce more products with the same labor costs. Thus, carrying out organizational and technical measures with a corresponding revision of production standards makes it possible to reduce production costs by reducing the share of wages in a unit of production simultaneously with an increase in the average wage of workers.

In the second case, when the established production standards and prices do not change, the cost of workers' wages in the cost of a unit of production does not decrease. But with an increase in labor productivity, the volume of production increases, which leads to savings on other expense items, in particular, production maintenance and management costs are reduced. This happens because in shop costs a significant part of the costs (and in general plant costs almost entirely) are semi-fixed costs (depreciation of equipment, maintenance of buildings, maintenance of shop and general plant equipment and other expenses) that do not depend on the degree of implementation of the production plan. This means that their total amount does not change or almost does not change depending on the implementation of the production plan. It follows that the greater the output, the smaller the share of workshop and general plant expenses in its cost.

With an increase in the volume of production, the profit of the enterprise increases not only due to lower costs, but also due to an increase in the number of products produced. Thus, the greater the production volume, the greater, other things being equal, the amount of profit received by the enterprise.

The most important importance in the struggle to reduce production costs is compliance with the strictest savings regime in all areas of the enterprise’s production and economic activities. The consistent implementation of the economy regime at enterprises is manifested primarily in reducing the cost of material resources per unit of production, reducing production maintenance and management costs, and eliminating losses from defects and other unproductive expenses.

Material costs, as is known, in most industries occupy a large share in the structure of product costs, so even a slight saving of raw materials, materials, fuel and energy in the production of each unit of production for the entire enterprise has a major effect.

The enterprise has the opportunity to influence the amount of material resource costs, starting with their procurement. Raw materials and materials are included in the cost price at their purchase price, taking into account transportation costs, so the correct choice of material suppliers affects the cost of production. It is important to ensure the supply of materials from suppliers who are located a short distance from the enterprise, as well as to transport goods using the cheapest mode of transport. When concluding contracts for the supply of material resources, it is necessary to order materials that, in size and quality, exactly correspond to the planned specification for materials, strive to use cheaper materials, without at the same time reducing the quality of the product.

The main condition for reducing the cost of raw materials and materials per unit of production is improving product designs and improving production technology, the use of advanced types of materials, and the introduction of technically sound standards for the consumption of material assets.

Reducing production maintenance and management costs also reduces production costs. The size of these costs per unit of production depends not only on the volume of output, but also on their absolute amount. The lower the amount of workshop and general plant expenses for the enterprise as a whole, the lower, other things being equal, the lower the cost of each product.

The reserves for reducing shop and general plant costs lie primarily in simplifying and reducing the cost of the management apparatus and saving on management costs. The composition of shop and general plant expenses also largely includes the wages of auxiliary and auxiliary workers. Carrying out measures to mechanize auxiliary and auxiliary work leads to a reduction in the number of workers employed in these works, and, consequently, to savings in workshop and general plant expenses. Automation and mechanization of production processes, reducing the share of manual labor costs in production are of utmost importance. Automation and mechanization of production processes make it possible to reduce the number of auxiliary and auxiliary workers in industrial production.

The reduction of workshop and general plant costs is also facilitated by the economical use of auxiliary materials used in the operation of equipment and for other economic needs.

Significant reserves for reducing costs are contained in reducing losses from defects and other unproductive expenses. Studying the causes of defects and identifying its culprit makes it possible to implement measures to eliminate losses from defects, reduce and use production waste in the most rational way.

The scale of identifying and using reserves for reducing product costs largely depends on how the work is carried out to study and implement the experience available at other enterprises.

According to the degree of homogeneity, all costs are divided into simple (single-element) and complex. Simple costs have a homogeneous content: raw materials, fuel, energy, depreciation, wages. Complex costs include heterogeneous elements. These include, for example, costs for the maintenance and operation of equipment, general shop expenses, etc.

Based on their dependence on changes in production volume, costs are divided into variable and semi-fixed. Variable (proportional) costs include costs, the size of which changes in proportion to changes in production volume. These costs include: costs for basic materials, cutting tools, basic wages, fuel and energy for technological purposes, etc. Conditionally constant (disproportionate) are costs whose size does not depend on changes in production volume. These include: wages of administrative and management personnel, costs of heating, lighting, depreciation, etc.

The cost of production is characterized by indicators expressing: a) the total amount of costs for all manufactured products and work performed by the enterprise for the planning (reporting) period - the cost of commercial products, comparable commercial products, sold products; b) costs per unit of volume of work performed - cost per unit of certain types of commercial products, semi-finished products and production services (products of auxiliary workshops), costs per 1 rub. commercial products, costs per 1 rub. regulatory clean products.

The cost of production is a qualitative indicator characterizing the production and economic activities of a production association or enterprise. Product cost is the cost of an enterprise in monetary terms for its production and sales. The cost, as a general economic indicator, reflects all aspects of the enterprise’s activities: the degree of technological equipment of production and the development of technological processes; level of organization of production and labor, degree of utilization of production capacity; economical use of material and labor resources and other conditions and factors characterizing production and economic activities.

Depending on the volume of included costs, a distinction is made between workshop, production and full cost. The workshop cost includes the costs of individual workshops for the manufacture of products. It is the initial basis for determining intermediate in-plant planned prices when organizing in-plant economic accounting. Production cost covers the enterprise's expenses for producing products. In addition to the workshop cost, it includes general plant expenses. The full cost of a product includes all costs associated with its production and sale. It differs from production costs by the amount of non-production expenses and is calculated only for marketable products.

Cost reduction is planned according to two indicators: for comparable commercial products; at costs per 1 rub. commercial products, if in the total output the share of products comparable to the previous year is small. Comparable commercial products include all types of products produced at a given enterprise in the previous period on a mass or serial basis.

The planned amount of cost reduction is determined based on the following calculations.

In terms of comparable commercial products. First, the absolute amount of savings is determined using the formula:

E abs.sr.t.p = N ni C bi - N ni C ni .

Having determined the amount of absolute savings in the planning period, calculate the desired percentage of cost reduction in the planning period (S av.t.p):

S average t.p = E abs. average t.p x100,

where E abs.sr.t.p - absolute savings from reducing the cost of comparable commercial products, thousand rubles; N ni C bi - planned output of comparable commercial products at the cost of the reporting period; N ni C ni - the same, at the cost of the planning period; n is the number of types of comparable commercial products.

In terms of costs per 1 rub. commercial products. Absolute savings from reducing the cost of marketable products in the planning period are calculated using the formula:

E abs.t.p = Z tnb - Z tpp TP x100

Based on the same data, the percentage of cost reduction per 1 ruble is determined. marketable products in the planning period in comparison with the reporting period (S’ t.p):

S’ t.p = Z tpb - Z tp x100,

where Z tpb - costs per 1 rub. marketable products in the reporting period, kopecks; 3 tpp - the same, in the planning period; TP - cost of marketable products in the planning period, thousand rubles.

It should be borne in mind that the level of costs is influenced by a number of factors, including changes in consumption rates and prices for materials, growth in labor productivity, changes in production volume, etc. In this regard, when calculating, it is necessary to determine the impact of each of them in general effect.

Cost represents the total costs of production and sales of products. They can be calculated both according to actual expenses and standard ones. Western companies also have standards for expenses, but they are calculated within each individual company and represent a trade secret. In Russia, at state-owned enterprises, the standards are of an industry-specific nature and do not represent any commercial secret. Unfortunately, in many cases, standards do not play the role of an incentive to reduce enterprise costs for production. Experience suggests that they are often the industry average. Enterprises always have the opportunity to prove that they operate in special conditions and industry standards are unacceptable to them.

The main motive for the activity of any company in market conditions is profit maximization. The real possibilities for realizing this strategic goal are in all cases limited by production costs and demand for manufactured products. Since costs are the main limiter on profits and at the same time the main factor influencing the volume of supply, decision-making by the company’s management is impossible without an analysis of existing production costs and their value for the future.

From the standpoint of the labor theory of value, K. Marx in “Capital” considered costs as expenses for wages, materials, fuel, depreciation of means of labor, i.e. for the production of goods. To these he added the costs of wages for trade workers (wholesale and retail), maintenance of retail premises, transport, etc. Marx called the first costs production costs, the second - distribution costs. At the same time, he did not take into account the market situation and a number of other circumstances. Marx proceeded from the fact that the value of a product is formed by production costs and those circulation costs that represent a continuation of the production process in the sphere of circulation, for example packaging, packing, etc.

Modern economic theory has a completely different approach to the interpretation of costs. It is based on the rarity of the resources used and the possibility of their alternative use. Alternative use means, for example, the possibility of producing building materials, furniture, paper, and a number of chemical products from wood. Therefore, when a company decides to produce a specific product, for example, furniture made of wood, it thereby refuses to produce wooden blocks for country houses. Hence the conclusion is drawn that the economic, or opportunity, costs of a certain resource used in a given production are equal to its cost (value) with the most optimal way of using it for the production of goods. Thus, economic costs are the payment to the supplier made by the firm, or the income of the resource supplier provided by the firm, as well as the internal costs of ensuring that the resources are used by this particular firm and for a particular production option.

5. Product costs - calculation part.

Let's consider the nature of changes in product costs under the influence of production volume using a specific example:

Table 1. Dependence of the total amount of costs and unit cost of production on production volume.

Production volume	Cost of the entire issue			Cost per unit of production, thousand.e.
	Fixed expenses	variable expenses		Fixed expenses	variable expenses

The table shows that the total amount of fixed expenses is 50 thousand. is fixed for all production volumes. Its absolute value does not change with an increase in production volumes, however, costs per unit of production decrease in proportion to its growth: production volume increased by 5 times and fixed costs per unit of production decreased by 5 times.

Table 2. Production costs.

Cost element	Amount, thousand.e.			Cost structure, %
Material costs
Salary
Contributions to the social protection fund
Depreciation of fixed assets
Other production costs
Total production costs
Business expenses
Full cost
Including:
variable expenses
fixed costs

As can be seen from the table, the actual costs of the enterprise are higher than planned by 6216 thousand. or by 8%. Overexpenditure occurred in all types and especially in material costs. The amount of both variable and fixed expenses has increased. The cost structure has also changed: the share of material costs and depreciation of fixed assets has increased, and the share of wages has decreased.

Table 3. Calculation of the influence of factors on the change in the amount of costs per monetary unit. commercial products.

	Amount, thousand.e.	Cost drivers
		output volume	product structure	variable costs	fixed costs
According to the plan for planned production:
According to the plan, recalculated to the actual volume of production:
According to the planned level for actual production output:
Actual at the planned level of fixed costs:
Actual:

The table shows that due to the exceeding of the plan for the production of commercial products in conventional physical terms by 2.6%, the amount of costs increased by 1,420 thousand.

Due to changes in the structure of product output, the amount of costs also increased by 1268 thousand. (80640-79372). This indicates that the share of cost-intensive products in the total output has increased. Due to an increase in the level of specific variable costs, the cost overrun for production amounted to 2,083 thousand. (82723-80640). Fixed expenses increased compared to the plan by 1,445 thousand. , which was also one of the reasons for the increase in total costs.

Thus, the total amount of costs is higher than planned by 6216 thousand. (84168-77952), or +8%, including due to exceeding the plan for the volume of production and changes in its structure, it increased by 2,688 thousand. (80640-77952), and due to the increase in production costs - by 3528 thousand. (84168-80640).

Consequently, the actual cost of all products produced in the reporting year is higher than planned by 3528 thousand cu, or by 4.38%.

Table 4. Calculation of the influence of factors on the change in the amount of costs per monetary unit. commercial products.

Costs per USD commercial products
		volume of production	production structure	level of unit variable costs	amount of fixed costs	selling prices for products
	77952/96000=81,2
	79372/98500=81,17
	80640/100800=80,0
	82723/100800=82,06
	84168/100800=83,5
	84168/104300=80,70
total change	80.7-81.2=-0.5 USD/100

Analytical calculations given in Table 4 show that the company has reduced its costs per unit equivalent. commercial products by 0.5 USD/100 (80.7-81.2), including due to an increase in production volume by 0.03 USD/100 (81.17-81.20) ; change in the structure of production – by 1.17 USD/100 (80.0-81.17); increase in wholesale prices for products - by 2.8 USD/100 (80.7-83.5). Other factors (the level of specific variable costs per unit of production, an increase in the amount of fixed costs) caused an increase in this indicator by 2.06 and 1.44 USD/100, respectively. At this enterprise, due to an increase in the level of wages, revaluation of fixed assets, an increase in the cost of raw materials, materials, energy, the amount of costs increased by 3255 thousand.e., and due to resource intensity by 303 thousand.e. Costs per USD marketable products increased respectively by 3.2 (3255/100800) and 0.3 (303/100800) cu/100.

Conclusion.

The cost of production is a qualitative indicator characterizing the production and economic activities of an enterprise. Cost reflects the enterprise's expenses for production and sales of products, expressed in monetary terms. In addition, the cost as a general economic indicator reflects all aspects of the enterprise’s activities: the degree of technological equipment of production and the development of technological processes; level of organization of production and labor, degree of utilization of production capacity; economical use of material and labor resources and other conditions and factors characterizing production and economic activities.

For a comprehensive analysis of product costs, special indicators are used that allow one to calculate and analyze the enterprise’s costs for the entire volume of commercial products produced, the costs of producing a specific type of product, as well as the enterprise’s costs for receiving each ruble of revenue.

In order to simplify calculations and to systematize data, all enterprise costs are classified. Moreover, this classification is universal for all industrial enterprises; only some articles may change depending on the specialization of the enterprise.

The most important point in studying such an indicator as cost is to consider the factors influencing the indicator and determine the main directions for reducing cost. How an enterprise solves this issue determines how to achieve the greatest effect at the lowest cost, increase savings, and save labor, material and financial resources. Cost reflects most of the cost of products and depends on changes in the conditions of production and sale of products. Therefore, technical and economic factors of production have a significant impact on the level of costs. This influence manifests itself depending on changes in technology, technology, organization of production, in the structure and quality of products and on the amount of costs for its production. It follows that identifying reserves for reducing costs should be based on a comprehensive technical and economic analysis of the enterprise: studying the technical and organizational level of production, the use of production capacities and fixed assets, raw materials, labor, economic relations; as well as all cost components.

Systematic reduction of costs ensures not only an increase in the profit of the enterprise, but also provides the state with additional funds both for the further development of social production and for improving the material well-being of workers.

Bibliography.

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Tomsk Polytechnic University Center for Distance Education Department of Economics Coursework

Cost, cost, price

Cost price- the initial cost of those costs that the enterprise bears for the production of a unit of product.

Price- the monetary equivalent of all types of costs including certain types of variable costs.

Price- the market equivalent of the generally accepted cost of the product offered.

Production costs- ϶ᴛᴏ expenses, monetary expenses, which are extremely important to carry out to create a product. It is worth saying that for an enterprise (firm) they act as payment for acquired factors of production.

Private and public costs

Costs can be viewed from different perspectives. If they are studied from the perspective of an individual company (individual manufacturer), we are talking about private costs. If costs are analyzed from the perspective of society as a whole, then external effects arise and, as a consequence, the need to take into account social costs.

Let us clarify the concept of external effects. In market conditions, a special purchase and sale relationship arises between the seller and the buyer. At the same time, relationships arise that are not mediated by the commodity form, but have a direct impact on people’s well-being (positive and negative external effects). An example of positive external effects is R&D expenses or training of specialists; an example of a negative external effect is compensation for damage from environmental pollution.

Social and private costs coincide only in the absence of external effects, or under the condition that their total effect is equal to zero.

Social costs = Private costs + Externalities

Fixed Variables and Total Costs

Fixed costs— ϶ᴛᴏ this type of cost that an enterprise bears within the framework of one production cycle. It is appropriate to note what is determined by the enterprise independently. All these costs will be typical for all product production cycles.

Variable costs— ϶ᴛᴏ such types of costs that are transferred to the finished product in full.

General costs- those costs that the enterprise incurs during one stage of production.

General = Constants + Variables

Opportunity Cost

Accounting and economic costs

Accounting costs— ϶ᴛᴏ the cost of the resources used by the company in the actual prices of their acquisition.

Accounting costs = Explicit costs

Economic costs— ϶ᴛᴏ the cost of other benefits (goods and services) that could be obtained with the most profitable possible alternative use of these resources.

Opportunity (economic) costs = Explicit costs + Implicit costs

These two types of costs (accounting and economic) may or may not coincide with each other.

If resources are purchased on a free competitive market, then the actual equilibrium market price paid for their acquisition is the price of the best alternative (if this were not the case, the resource would go to another buyer)

If resource prices are not equal to equilibrium due to market imperfections or government intervention, then actual prices may not reflect the cost of the best rejected alternative and may be higher or lower than opportunity costs.

Explicit and implicit costs

From the division of costs into alternative and accounting costs follows the classification of costs into explicit and implicit.

Explicit costs are determined by the amount of enterprise expenses for paying for external resources, i.e. resources not owned by the firm. For example, raw materials, materials, fuel, labor, etc. Implicit costs are determined by the cost of internal resources, i.e. resources owned by the firm.

An example of an implicit cost for an entrepreneur would be the salary that he could receive as an employee. It is worth saying that for the owner of capital property (machinery, equipment, buildings, etc.), previously incurred expenses for its acquisition cannot be attributed to the obvious costs of the present period. In this case, the owner bears implicit costs, since he could sell the property and put the proceeds in the bank at interest, or rent it out to a third party and receive income.

Implicit costs, which are part of economic costs, should always be taken into account when making current decisions.

Explicit costs— ϶ᴛᴏ opportunity costs, which take the form of cash payments to suppliers of factors of production and intermediate goods.

Explicit costs include:

• workers' wages
• cash costs for the purchase and rental of machines, equipment, buildings, structures
• payment of transportation costs
• communal payments
• payment to suppliers of material resources
• payment for services of banks, insurance companies

Implicit costs— ϶ᴛᴏ opportunity costs of using resources owned by the company itself, i.e. unpaid expenses.

Implicit costs can be represented as:

• monetary payments that a firm could receive if it used its resources more profitably
• for the owner of capital, implicit costs will be the profit that he could have received by investing his capital not in this, but in some other business (enterprise)

Returnable and sunk costs

Sunk costs are considered in a broad and narrow sense.

In the broad sense of the word, sunk costs are those expenses that the company cannot return even if it ceases its activities (for example, the costs of registering a company and obtaining a license, preparing an advertising sign or company name on the wall of a building, making seals, etc. .) Sunk costs will be like the firm's payment for entering or leaving the market.

In the narrow sense of the word sunk costs— ϶ᴛᴏ costs for those types of resources that have no alternative use. For example, the costs of specialized equipment manufactured to order from the company. Since the equipment has no alternative use, its opportunity cost is zero.

Sunk costs are not included in opportunity costs and do not influence the firm's current decisions.

Fixed costs

In the short run, some resources remain unchanged, while others change to increase or decrease total output.

In this context, short-term economic costs are divided into fixed and variable costs. In the long run, this division becomes meaningless, since all costs can change (i.e. will be variable)

Fixed costs— ϶ᴛᴏ costs that do not depend in the short term on how much the company produces. It is worth noting that they represent the costs of its constant factors of production.

Fixed costs include:

• payment of interest on bank loans;
• depreciation deductions;
• payment of interest on bonds;
• salary of management personnel;
• rent;
• insurance payments;

Variable costs

Variable costs— ϶ᴛᴏ costs, which depend on the volume of production of the company. It is worth noting that they represent the costs of the firm's variable factors of production.

Variable costs include:

• wage
• fare
• electricity costs
• raw materials costs

From the graph we see that the wavy line depicting variable costs rises with increasing production volume.

This means that as production increases, variable costs increase:

General (gross) costs

General (gross) costs— ϶ᴛᴏ all costs at a given time necessary for the production of a particular product.

Total costs (total cost) represent the firm's total expenses for paying for all factors of production.

Total costs depend on the volume of output and are determined by:

• quantity;
• market price of the resources used.

The relationship between the volume of output and the volume of total costs can be represented as a cost function:

which is the inverse function of the production function.

Classification of total costs

Total costs are divided into:

total fixed costs(!!TFC??, total fixed cost) - the company’s total costs for all fixed factors of production.

total variable costs(, total variabl cost) - the company’s total expenses on variable factors of production.

Based on all of the above, we come to the conclusion that

At zero output (when the firm is just starting production or has already ceased its activities), TVC = 0, and, therefore, total costs coincide with total fixed costs.

Graphically, the relationship between total, fixed and variable costs can be depicted, similar to how it is presented in the figure.

Graphical representation of costs

The U-shape of the short-term ATC, AVC and MC curves will be an economic pattern and demonstrates law of diminishing returns, in which case the additional use of a variable resource with a constant amount of a constant resource leads, starting from a certain point in time, to a reduction in marginal returns, or marginal product.

As has already been proven above, marginal product and marginal costs are inversely related, and, therefore, this law of decreasing marginal product can be interpreted as the law of increasing marginal costs. In other words, ϶ᴛᴏ means that starting from a certain point in time, additional use of a variable resource leads to an increase in marginal and average variable costs, as shown in Fig. 2.3.

Figure No. 2.3. Average and marginal costs of production

The marginal cost curve MC always intersects the lines of average (ATC) and average variable costs (AVC) at their minimum points, just as average product curve AP always intersects the marginal product curve MP at the point of its maximum. Let's prove it.

Average total costs ATC=TC/Q.

Marginal cost MS=dTC/dQ.

Let us take the derivative of average total costs with respect to Q and obtain

Thus:

• if MC > ATC, then (ATS)" > 0, and the average total cost curve of ATC increases;
• if MS< AТС, то (АТС)" <0 , и кривая АТС убывает;
• if MC = ATC, then (ATS)"=0, i.e. the function is at the extremum point, in this case at the minimum point.

In a similar way, you can prove the relationship between average variable costs (AVC) and marginal costs (MC) on the graph.

Costs and price: four models of firm development

Analysis of the profitability of individual enterprises in the short term allows us to distinguish four models of development of an individual company, depending on the ratio of the market price and its average costs:

1. If the average total costs of the company are equal to the market price, i.e.

ATS=P,

then the firm earns “normal” profits, or zero economic profit.

Graphically this situation is depicted in Fig. 2.4.

Figure No. 2.4. Normal profit

2. If favorable market conditions and high demand increase the market price so that

ATC< P

then the company receives positive economic profit, as ϶ᴛᴏ is presented in Figure 2.5.

Figure No. 2.5. It is worth saying - positive economic profit

3. If the market price ϲᴏᴏᴛʙᴇᴛϲᴛʙminimum the firm’s average variable costs,

then the enterprise is located at the limit of expediency continuation of production. Graphically, a similar situation is shown in Figure 2.6.

Figure No. 2.6. A firm at its limit

4. And finally, if market conditions are such that the price does not cover even the minimum level of average variable costs,

AVC>P,

It is advisable for the company to close its production, since in this case the losses will be less than if the production activity continues (more details about this in the topic “Perfect competition”)

See further:

• Distribution costs
• Transaction costs