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h) for social enterprise development and improving material incentives, taking into account the needs of social, cultural, housing events and its cost. Increase of material incentives is possible by adopting the principle of participation in profits;
i) to ensure compliance with tax obligations to the state;
j) to pay dividends (if such costs are mentioned in the foundation documents). The economic basis for this payment of dividends on stocks and bonds, except shares of a joint stock company, according to many experts, is that owners play roles of creditors of the of the enterprise and should receive a portion of profits as dividends, which corresponds to the cost of debt capital on the markets of production factors (the lower limit ) or equal to the additional profits earned by the enterprise-borrower from the use of additional capital in the planning period in proportion to the share capital in the total amount of the funds (upper limit).
The second step compares the amount of demand for income in all areas of its use with a capacity of enterprises to receive it.
Total demand for profits by the above mentioned directions of its use is one of the variants of the value of the target company's profit.
Final decisions on the planned uses of profits made after the profit plan taking into account the potential to receive it.
Each company produces an annual plan and budget estimates of the actual use of the accumulation fund and the consumption fund. Each of these estimates show balance the flow of funds in the financial year, expenditure on specific areas, the balance at the beginning of a future period. The actual performance of the estimates is analyzed with planned developments.
Retained earnings of previous years may be directed towards replenishment of the reserve fund, to increase the authorized capital, to increase funds for special purposes (to purchase the property, etc.) (http://www.xserver.ru/user/pkpri/5.shtml).
Types of costs
Production of any commodity is a cost of economic resources - raw materials, fuel, energy, labor, transportation and other services. Payment for all of these resources represents a cost of production. Due to the fact that not all of these resources are actually paid, that is, some of which the company can use as a free, economists distinguish between explicit and implicit costs.
Explicit costs (external accounting) - a cash payment for the resources obtained from (wages, payment for the supply of raw materials, transportation, legal, consulting and other services).
Implicit (internal) costs - are costs associated with the use of enterprise’s own resources. In contrast to the explicit, these costs are not paid, are not reflected in financial statements, they are hidden, ie, they are firm's own resources used in its manufacture. The magnitude of these costs is determined by income, which could bring these resources in their most profitable alternative use. The existence of implicit costs can be illustrated by the activities of the firm or enterprise, which uses owned and rented production facilities, equipment, machines. The company pays for the use of foreign capital rent, which includes interest and depreciation. Since the alternative use of company-owned capital, such as giving it for rent, would have brought in revenue as interest, then the firm must take into account the cost of using own capital. They represent the interest on capital.
There is another point from which costs may be considered. Part of used economic resources may be owned by a firm, owned by their respective owners. Another part of the resources the firm acquires from suppliers who are not owners of the firm. Thus, firm may have production facilities and equipment, vehicles, etc. At the same time, the company buys raw materials, fuel, energy, labor services, etc. Using any resource entails costs. Costs for use of own land is called rent, or internal rent, the costs of using entrepreneurial skills of company owner are called the normal profit, costs for use of company-owned industrial buildings, equipment and other items of real capital is called interest.
Thus, economists include into the economic costs of production all costs - internal and external, including rent into internal costs, normal profit and interest in order to attract and use resources in the competitive enterprise. Accounting costs are equal to the total external costs. From these definitions it follows that the economic costs are bigger than accounting costs for the amount of internal costs of the firm.
Accounting department registers production costs. The accountant records the actual costs that have occurred in the last period, determines the actual total costs in cash. If the production costs include only explicit costs, then their sum can be understated, and the difference between the proceeds from sales and explicit costs will be overstated.
Sunk costs (may be also referred as Fixed costs). There are also so-called sunk costs, which the company has spent, but won’t be able to recover. Sunk costs do not influence the firm’s decision-making on actions in future. But we can estimate the previous decisions that led to the emergence of sunk costs.
The volume of total cost of firm varies depending on the output Q. If the output increases, then total costs increase also. If production reduces, company’s costs also reduce.
The amount of some types of costs remains constant, independent of production volume. Fee for leased space, equipment, other costs remain constant, no matter how varies the production volume. The firm’s costs, the amount of which does not depend on the volume of output, called the fixed costs (FC).
At the same time, the costs of materials, fuel, energy, salaries and other change along with the output. If the production output stops, then such costs reduce almost to zero. With the growth of production variable costs increase, while the total value of fixed costs remains unchanged. Costs of production, the magnitude of which depends on the volume of output, called the variable (VC) cost of the firm. Total (TC), or gross, the cost to the company equal to the sum of fixed and variable costs: TC = FC + VC. Fig. 1 shows the line of fixed costs, variable costs and total costs curves. These forms of curves have most of the firms.
Fig. 1. Constant, variable and total costs of firm
So, there are:
Fixed costs:
Costs that don't change over a period of time and don't vary with output. E.g. salaries, rent, tax, insurance, heating and lighting. Fixed costs can also be called indirect costs as they are not directly associated with the final product. Fixed costs have to be paid even if the company is not producing any goods.
Variable costs:
Costs that vary directly with output so when output increases, variable costs also increase. E.g. raw materials, electricity. Variable costs can also be called direct costs as they are directly associated with production.
Semi-variable costs:
These costs have fixed and variable elements. E.g. a person working for the company may have a fixed salary but may also earn commission on sales.
Total costs are calculated by adding together fixed, variable and semi-variable costs.
2 Main ways of decreasing the costs
Production costs depend on the effective use of economic resources and are determined by the cost of unit of production.
In order to minimize costs, the company shall take the following action:
• what is the best way to organize the production of existing production facilities
• which new production capacities to choose taking into account scientific and technological progress;
• what is the best way to adapt to discoveries and inventions.
Correct solution of these problems should lead to profits.
Fig. 2 Graph showing the number of products in the function of minimum production costs
Isocost - is a graphic representation of the production function with a straight line, which shows all the combinations of factors of production, the use of which requires the same cost.
K - volume of production;
L - labor;
C0, C1, C2, C3 - isocosts;
Q = B * (K * L) – firm’s production function in the long run.
The curve of Q determines the volume of production, in which the enterprise should carry minimal level of costs.
Company can not select C0 isocost, as there is no such combination of factors that would provide the output Q when their value is equal to C0. Given volume of production can be achieved at a cost of C2, where the cost of capital and labor are, respectively: K2L2 at point A and K3L3 at point B, but in this case the costs will be minimal, so the chart shows that the most effective solution - the point N ( K1L1), which ensures minimization of production costs. Since prices on the factors of production change, C1 changes its slope to C3. Since the speed of capital increases, the best option would be the point M (K4L4), which ensures minimization of costs.
The equilibrium is determined by the terms of achieving maximization of profits. To achieve this, the firm must use variable resources in such quantities, that ratio of norms of technological substitution of one resource to another, equal to the ratio of prices of these resources.
Constant effect of production scale growth is characterized by the fact that the volume of production increases in the same proportion as the cost of resources.
P - price realization.
Negative effect of production scale growth is characterized by the fact that the output increases less than the cost of resources.
Positive effect of production scale is characterized by the fact that the volume of production increases in the proportion that exceeds the proportion of the increased costs of resources.
Main directions of reducing the costs of production:
1. The use of scientific and technological progress;
2. Improving the organization of production on the basis of productivity increase through reduction of working time wastes;
3. State regulation of economic processes (http://zubolom.ru/lectures/economy/28.shtml)
There is another essence of costs decreasing. Costs can be decreased if in the company was created the system of effective control over costs. Such system involves classification of costs, depending on how easily they can be adjusted using the alternative solutions, and consists of the following elements:
Cost Accounting.
Sometimes you can reduce costs by simply starting counting them systematically. It was noticed, for example, that when the company begins to record outgoing long distance and international calls to their staff on the date, time and purpose, the total number of calls is reduced due to a decrease of personal calls.
Staff’s support of cost accounting system.
Employees should be attracted to follow the cost accounting system. If there is a strong staff resistance to change cost accounting system the leader should explain the need to reduce costs, make staff understand that their proposals regarding savings are of high importance and will be valued in future (maybe financially).
Analysis of the causes of costs in the company.
Such analysis allows to take the necessary steps immediately to eliminate the causes of an undesirable increase in cost. Thus, if the entertainment expenditures rise, it is useful to determine why employees are spending company’s money in expensive restaurants. Company actively expands its clients base and the number of signed contracts grows? Or because the control over the entertainment expenditures became weak?
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