Variable costs - the way to reduce costs

In the process of setting the price for the created product or service, the enterprise takes into account the huge number of elements that somehow affect the final cost of the product. Of these, prime cost and the most basic is the cost. In the economy, this indicator represents the sum of all costs (fixed as well as variable costs) incurred by the enterprise in the process of creating the final product. It is this economic magnitude that has a decisive influence on the price of the goods, because exactly the prime cost is the initial parameter, on which the remaining values (taxes, sales percentages, etc.) are superimposed. Based on the criteria of the efficiency of the enterprise, the main goal of any organization producing products or providing services is to reduce the cost price.

To reduce the cost price it is possible, as much as possible reducing variable costs is that part of expenses directly influenced by the volume of the produced goods. These types of costs include:

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

- costs of fuel and energy used;

- wages of employees, piece-workers and other personnel, which directly relates 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, which vary absolutely in the same proportion as the volume of output;

B) progressive - a set of costs, the growth rate of which is greater than the rate of growth in production;

C) regressive - costs that grow at a slower rate than the production volume.

Variable costs are precisely that part of the cost of production, which can be reduced through effective use. A full analysis of the consumables and resources used will show the ways of reducing the cost: the introduction of energy-saving technologies, new machines and equipment - all this will reduce the amount of consumed fuel, energy, reduce the loss from marriage and increase the speed of product unit.

To determine the profitability of a product of a given quantity of goods allows such a concept as the average production costs, including average constant, as well as the average variable costs. This economic indicator gives an idea of how much of the costs are for the production of a single product. The average fixed costs can be calculated as follows: the total amount of fixed costs, which does not depend on the number of products produced by the organization, is divided into the quantity of the goods themselves.

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

Average variable costs directly depend on the growth of production: if the volume of output increases, so do costs, and vice versa. The output to reduce the level of this indicator is the innovation and effective use of tangible and intangible funds of the organization.