Variable costs - the way to reduce costs

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the process of setting a price for a created product or service, an enterprise takes into account a huge number of elements that in one way or another affect the final cost of the product. Of these, the primary and most basic is the cost. In economics, this indicator is the sum of all costs (fixed as well as variable costs) that an enterprise has incurred in the process of creating the final product. It is this economic value that has a decisive influence on the price of the goods, because it is the cost price that is the initial parameter on which other values \u200b\u200bare superimposed (taxes, percentages of sales, etc.). Based on the criteria for the efficiency of the enterprise, the main goal of any organization that produces products or provides services is to reduce costs.

You can reduce the cost by minimizing variable costs - this is the part of the costs that is directly affected by the volume of goods produced. These types of costs include:

- the cost of material resources involved in the production of goods;

- cost of fuel and energy used;

- salarywages for pieceworkers and other personnel who are directly related to the production process;

- all costs that are written off for the maintenance of machinery and equipment (not including depreciation).

As an economic category, the variable costs of an enterprise can be considered as one of three options:

a) proportional - costs that change absolutely in the same proportion as the volume of production;

b) progressive - a set of costs whose growth rate is greater than the growth rate of production;

c) regressive - costs growing at a slower pace than production volume.

Variable costs are precisely that part of the cost of production that can be reduced through their effective use. A complete analysis of consumables and resources used will show ways to reduce costs: the introduction of energy-saving technologies, new machinery and equipment - all this will reduce the amount of fuel and energy consumed, reduce losses from scrap and increase the speed of producing a unit of goods.

Determine the profitability of the product of a given quantity of goods allows such a concept as the average production costs, including average fixed and average variable costs. This economic indicator gives an idea of how much the cost is for the production of one copy of the product. Average fixed costs can be calculatedas follows: the entire amount of fixed costs, which does not depend on the quantity of products produced by the organization, is divided by the quantity of goods itself.

Thus, the cost per unit of output is obtained. At the same time, it becomes clear that with an increase in the quantity of goods produced, the size of average fixed costs decreases. What cannot be said about the second indicator, which is part of the average costs.

Average variable costs directly depend on the growth of production: if the volume of production grows, so do the costs, and vice versa. The way out to reduce the level of this indicator is innovation and efficient use of the organization's tangible and intangible assets.