Direct costs and fixed costs of the enterprise

Production costs are the costs of acquiring factors of production: land, capital, labor. The costs of production, which include a normal profit, are called economic or imputed. And they are not equivalent to the economic costs that are used in accounting. In them, the profit of the owner of the firm is not included.

So, what does the cost structure look like?

Gross costs are the costs that are required to produce a particular product at a given time. They are variable and constant. The first group is direct costs. Constant costs do not depend on how much production is produced and the organization carries them in any case. These include the cost of payment for utilities, the purchase of buildings, etc.

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

Constant costs and direct costs are included in the cost of production.

The enterprise should clearly determine the possible volumes of output in order to avoid excessively high production costs. For this, we need to investigate the dynamics of average costs. If direct costs and fixed costs are attributed to how much production will be produced, then the average costs will be obtained.

Average costs may be higher than the market price, equal to or lower. The enterprise will be profitable if they are lower than the market price. When an enterprise compares its production costs in various industries, it receives a sum of alternative costs. They represent the costs of producing other goods, from the release of which the entrepreneur can refuse, if he considers that his product can create greater efficiency. To formulate a firm's strategy, it is necessary to determine additional or marginal costs. They are necessary provided that the enterprise increases the volume of output per unit of goods. If it is assumed that direct costs will be unchanged, marginal costs are equal to the increment of variable costs (raw materials, labor).

It is important for a firm to compare marginal costs and averages. This helps in the management of the organization, determining the optimal volumes of production, in which the enterprise always receives profit and is consistently profitable.

In modern market conditions, to calculate the efficiency of 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, since they affect the volume of output.

To reduce costs, it is necessary to carry out certain activities: staff development, use of new machinery and production technologies, application of new transportation methods, new advertising, and trade.