Direct costs and fixed costs of the enterprise

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

Production costs are the costs of acquiring factors of production: land, capital, labor. Production costs that include normal profit are called economic or imputed. And they are not equivalent to the economic costs that are used in accounting. They do not include the profit of the owner of the company.

So what does the cost structure look like?

Gross costs are the costs that are required to produce a particular product at a given point in time. They are variable and permanent. The first group is direct costs. Fixed costs do not depend on how many products are produced and the organization bears them anyway. These include the cost of paying utilities, buying buildings, etc.

Direct production costs are the costs associated with labor costs, the purchase of basic materials and raw materials, fuel, etc. They are directly dependent on the output of manufactured products. The more products you need to produce, the more raw materials you will need.

Fixed costs anddirect costs are included in the cost of production.

An enterprise should clearly define the possible volumes of output in order to avoid excessively high production costs. To do this, you need to study the dynamics of average costs. If direct costs and fixed costs are included in how many products will be produced, then the average cost will be obtained.

Average costs can be above, equal to or below the market price. The enterprise will be profitable if they are below the market price. When an enterprise compares its production costs in different industries, it obtains the sum of opportunity costs. They are the costs of producing other goods, which the entrepreneur may refuse to produce if he believes that his product can create more efficiency.

To formulate a firm's strategy, incremental or marginal costs must be determined. They are necessary when the company increases the volume of production per unit of goods. If direct costs are assumed to be constant, then marginal cost is equal to the increase in variable costs (raw materials, labor).

It is important for a firm to compare marginal and average costs. This helps in managing the organization, determining the optimal production volumes at which the enterprise always makes a profit and is consistently profitable.

In today's market conditions to calculateefficiency in production, a comparison of income and costs is assumed. The expenses include wages, expenses for materials, components, utilities and others. Direct costs can be considered key, as they affect the volume of production.

To reduce costs, some measures need to be taken: staff development, the use of new equipment and production technologies, the use of new modes of transportation, new advertising, trade.