Lessons 5 · 1 lessons · E. Sariqov, B. Xaydarov. Fundamentals of Economic Knowledge (Economics), Grade 9, 4th edition. “Huquq va Jamiyat” publishing house, Tashkent, 2019
5
A firm’s funds and costs
Textbook: pp. 25–28
GoalDistinguish and calculate a firm’s fixed and working capital, depreciation, sources of finance, and fixed, variable, total and average costs.
New words
fixed capital · asosiy mablag‘working capital · aylanma mablag‘depreciation charge · amortizatsiya ajratmasiaverage cost · o‘rtacha xarajat
Explanation
A firm’s funds are of two kinds: fixed capital (spent on means that serve for many years, such as buildings, machines, tractors) and working capital (spent on raw materials, fuel, materials and wages). Working capital keeps turning from money into resources, then into finished goods and, once sold, back into money. Fixed assets wear out slowly and each year part of their price passes into the price of the product; this part is called the depreciation charge, and to find it for a year we divide the asset’s price p by its period of use n: A = p : n. The firm’s internal sources of finance are net profit (profit after taxes), the depreciation fund and the charter fund; external sources are extra contributions from owners, loans from banks or other firms, and money from selling securities, and these must be repaid. Costs are fixed (FC: rent, loan interest, insurance — independent of output) or variable (VC: raw materials, wages, energy — growing with output), and their sum is total cost: TC = FC + VC. The average cost per unit is AC = TC : q, and it shows the unit cost of the product.
Worked examples
A sewing workshop uses a machine worth 84 mln so‘m for 7 years. The annual depreciation charge is A = 84 000 000 : 7 = 12 000 000 so‘m. Each year this sum is added to the price of the finished product and accumulates in the depreciation fund, to be spent later on replacing the machine.
A bakery baked 10 000 loaves in a month. Fixed costs (rent, insurance, depreciation) were 9 mln so‘m and variable costs (flour, gas, wages) 21 mln so‘m. TC = 9 + 21 = 30 mln so‘m, AC = 30 000 000 : 10 000 = 3 000 so‘m. If it sells a loaf for less than 3 000 so‘m, the bakery makes a loss.
Class activity
“Cost cards”. Cards name various costs: rent, flour, wages, insurance, gas, depreciation, loan interest, etc. Groups sort them into “fixed” and “variable” columns and explain why. Debatable cards (for example wages) are discussed separately.
Practice
1
Give one example each of a fixed and a variable cost and state the difference.
Fixed: rent — paid even when nothing is produced; variable: raw materials — the more produced, the more is used.
2
A building costing 150 mln so‘m is used for 20 years. What is the annual depreciation charge in so‘m?
7500000
3
A firm’s fixed costs are 54 mln so‘m and its variable costs 126 mln so‘m. What percent of total cost is fixed?
30
4
Why must external sources of finance be repaid while internal ones need not be?
External sources are other people’s money (a loan or an extra contribution), while internal ones are the firm’s own profit and funds; a debt must be returned by a set date, often with interest.