Why don t companies need to consider fixed costs when making short term decisions?

Because the fixed cost does not change with the change of output in the short term, it has already happened, and has nothing to do with the current decision-making, no matter whether it is produced or not, how much it is produced, it is so much fixed cost, it can also be considered as a sunk cost, if the fixed cost is considered when making a decision, the decision may be wrong, the example is as follows:

For example, there is a company with a fixed cost of 1,000 yuan, and the average variable cost of producing a unit of product is 2 yuan, and now there is an order, ** is 3 yuan, and 500 pieces are produced. If the fixed cost is considered, the production cost is 1000 2 500 = 2000 yuan, and the sales revenue is 3 500 = 1500 yuan, then the income is less than the cost, and the decision not to produce is made; But if the fixed cost is not considered, the product's ** of 3 yuan is greater than the variable cost of 2 yuan, so to produce, and in fact make the decision to make production is correct, because this order will make up for the fixed cost of 500 yuan, which is equivalent to earning.

We hope you find the following information helpful:

Fixed cost, also known as fixed cost, refers to the total cost within a certain period of time and within a certain business volume, which can remain unchanged without being affected by the increase or decrease of business volume.

Classification of fixed costs.

Fixed costs can generally be distinguished between binding fixed costs and discretionary fixed costs.

1) Binding fixed costs.

Costs that must be incurred to maintain the company's ability to provide products and services, such as depreciation of plant and machinery, property taxes, house rents, salaries of managers, etc. Since these costs are associated with maintaining the ability of the business to operate, they are also known as capacity costs. Once the amount of such costs has been determined, it cannot be easily changed and is therefore quite binding.

2) Discretionary fixed costs.

Before the beginning of the fiscal year, the management of the enterprise shall determine the budget amount for the planning period according to the operating and financial resources, such as new product development expenses, advertising expenses, staff training expenses, etc. Since the budget for this type of cost is only valid during the budget period, business leaders can determine the budget number for different budget periods according to the changes in the specific situation, so it is also called self-determined fixed costs. The amount of such costs is non-binding and may be determined on a case-by-case basis.

Let's say you produce a product, and its variable cost.

It's $8, fixed cost.

It's $2, so you might as well assume it's $2 depreciation.

That's easy to understand. Your capacity is 10,000 pieces, and now you are only using 7,000 pieces. Now some people say that they want 9 yuan a piece to order 1000 products, do you agree?

You should agree, why, because for every product you produce, you only need to invest 8 yuan, and the other 2 yuan, whether you produce these 1,000 pieces or not, it is destined to happen. That is to say, if you take these 1000 orders, you can still earn 1 yuan per piece, if you don't take it, you say that my cost is 10 yuan, then you will lose. So, if you consider fixed costs in short-term decision-making, you may be making the wrong decision.

Hello dear! We'll be happy to answer for you. In the short-term raw potato production decision-making, why should the enterprise not use the profit and ask for the contribution as the basis for the decisionA:

Profit is the result of the entrepreneur's business, the comprehensive reflection of the business effect, and the concrete embodiment of its final results. Contribution refers to the dedication of one's own possession to others, or the promotion of social progress and development through one's own actions, which is a spirit of self-sacrifice.

Opportunity cost refers to the cost of choosing one decision over any other decision when making one. Although it is not directly included in the financial statements, it must be taken into account in the short-term business decision-making process.

On the one hand, understanding opportunity costs can help companies determine the best business decisions to optimize resource allocation and profit levels. On the other hand, ignoring the opportunity cost can lead to bad decisions and loss of potential profit opportunities.

In short, short-term business decisions need to be made based on a variety of factors, including direct costs, indirect costs, opportunity costs, etc., to make the best decision-making plan. While opportunity costs do not need to be included in the cost policy and reporting, they must be given due consideration in the decision-making process.

Short-term decision-making is also known as "short-term business decision-making". In Western enterprise management, business decisions can be divided into short-term decision-making and long-term decision-making according to the length of the decision-making period. Generally, it is divided by one year, and decisions of more than one year are long-term decisions; A year or less is a short-term decision.

The most commonly used specialized methods for short-term decision analysis are: difference analysis and cost-benefit analysis. Then, based on the results of the decision, a short-term business plan is formulated.

Short-term decisions usually involve only one-time specialized operations within one year and only have an impact on the profit and loss of the period. It generally does not involve long-term planning decisions such as new fixed asset investment and enterprise development strategies. For example, product production decisions:

1) What is involved in production? How much is produced? How to organize production?

2) Should I accept additional orders? (3) Should the production of loss-making products be stopped? (4) Are the parts self-made or purchased?

5) How to determine the best selling price of a product? (6) How to distribute profits? Wait a minute.

The short-term decision-making of construction enterprises generally refers to the total annual contract, project selection and whether to bid, bidding strategy, selection of subcontracting and signing of contracts after winning the bid, materials and whether to lease construction machinery, etc. For these decisions, the main consideration should be how to make the most rational and full use of the existing resources (including human, material and financial resources) to achieve the best economic benefits. In addition, when making bidding decisions, it is also necessary to grasp the situation of the bidding opponent and its advantages, and take.

Classification of costs: Costs are divided into two parts: production expenses and operating expenses according to their economic use.

Production expenses: refers to the various expenses incurred by the enterprise in the production process for the production of products within a certain period of time, and this part of the expenses will be included in a certain product, that is, the cost of the product. Operating Expenses:

It refers to the general cost of expenses but not in the production process of the product, usually including management expenses, financial expenses, sales expenses. Management expenses: refers to the expenses incurred by the administrative department of the enterprise for organizing and managing the business activities of the enterprise.

Financial expenses: refers to the expenses incurred by enterprises in financial activities such as raising funds. Sales expenses: refers to the various expenses incurred by the enterprise to sell products.

Summary. Hello dear, I'm glad to answer for you, businesses are often faced with such a choice: is a certain part or part in the product homemade or purchased?

When making such a decision, compare the cost of in-house and outsourced parts of a component or part. When making such a decision, the key is to choose the right cost (associated cost). If you use costs that shouldn't be used, and you miss costs that shouldn't be used, you can make a mistake.

In short, the contribution analysis method has an important position and role in the production and operation decision-making of enterprises, especially in the face of China's WTO and the entry of foreign-funded enterprises, which has put forward new challenges to our original business philosophy and decision-making methods, and it is particularly critical to improve the ability and level of production and operation decision-making, so the contribution analysis method has a wide range of application prospects.

In short-term production decisions, why should companies not use profits but contributions as the basis for decision-making?

Hello dear, I'm glad to answer for you, businesses are often faced with such a choice: is a certain part or part in the product homemade or purchased? When making this jujube-shaped Kai decision, it is necessary to compare the cost of in-house and outsourced rental parts or parts.

When making such a decision, the key is to choose the right cost (associated cost). If you use costs that shouldn't be used, and you miss costs that shouldn't be used, you can make a mistake. In short, the contribution analysis method has an important position and role in the production and operation decision-making of enterprises, especially in the face of China's WTO and the entry of foreign-funded enterprises, which has put forward new challenges to our original business philosophy and decision-making methods, and it is particularly critical to improve the ability and level of production and operation decision-making, so the contribution analysis method has a wide range of application prospects.

Because of this, in short-term decision-making, the criterion of decision-making should be contribution (incremental profit), not profit.

In short-term production decisions, why should enterprises not use profits but use contributions as the basis for decision-making?

Profit is the business results of entrepreneurs, a comprehensive reflection of the business effect of the enterprise, and a concrete embodiment of the final results of its bulk sales. Contribution refers to dedicating one's own possession to others, or promoting social progress and development with one's own actions, etc., which is a spirit with the nature of self-sacrifice and filial piety.

Because in the daily operation of the enterprise, the equipment, plant, etc. have been built and cannot be changed, and the only way to increase output is to increase variable input factors such as labor or raw materials. In this case, it is natural to use the short-term cost function to make a decision, because it contains fixed costs.

In long-term planning, enterprises can consider increasing or decreasing assets such as plant and equipment to further reduce costs, at which time, all input factors become variable, so the long-term cost function should be used.