In order to successfully operate in a modern market, enterprises must implement a range of measures aimed at increasing competitiveness. Factors of increasing this indicator are: pricing policy, assortment, location of the point of sale, quality of goods and services, scientific and technological development and modern equipment of production, high qualification of personnel, territorial distribution of points of sale within the country and abroad. For the effective implementation of pricing policies, the company should regularly review its costs and reduce them.
Cost Reduction Factors
To achieve a reduction in the cost of producing goods, it is necessary to fulfill a number of conditions:
- increase labor productivity;
- reduce labor intensity;
- reduce the rate of material consumption;
- reduce marriage;
- introduce a saving mode at the enterprise
In the aggregate, procedures aimed at reducing costs will help the company increase profits with the same or increased volume of production.
Let us dwell in more detail on material consumption, since it is the article of material costs in most cases that occupies the bulk of the cost structure. If the indicator increases in dynamics, it means that raw materials are used inefficiently, and the company needs to review and adjust the costs of raw materials and components.
Material consumption
This is an indicator characterizing how much material is used to produce a unit of production. In other words, what is the share of material costs in production costs. For example: industries with a large share of the cost of raw materials include smelting of metals, production of granulated sugar, mechanical engineering and others.
The structure of material consumption includes basic materials, auxiliary, as well as fuel, energy and depreciation of fixed assets.
Material consumption is an indicator opposite to material output.
Calculation formula
Material consumption - this is the figure that is in direct correlation with the amount of material costs. That is, the higher the sum of the costs of raw materials in the manufacturing process of the product, the greater will be the consumption of materials, the formula for calculating which is presented below:
Me = MZ / C, where
Me - material consumption,
MZ - the sum of the costs of the purchase of raw materials,
C is the total cost of the finished product.
Types of material consumption
There are several types of material consumption. It is specific, structural and absolute. Specific material consumption indicates the proportion of materials in one piece of goods in physical terms. Structural helps to find out what proportion in money terms a particular type of raw material in the production of a unit of product. The absolute value will allow the manager to find out the rate of resource consumption for the production of one piece of product, as well as its share in net weight and the level of inventory costs. It is calculated by the ratio of the net weight of the product to the rate of consumption of raw materials per unit of output. Specific consumption is the sum of the products of raw materials and their specific gravities in the composition of the product.
Ways to improve
Firstly, it is determined whether the expenditure plan matches the actual figures. Secondly, they decide how much the organization needs such resources. Thirdly, they evaluate the effectiveness of the use of materials. Fourth, using factor analysis, they find out which resources require more, and where it is necessary to reduce resource consumption. Fifthly, they calculate the cost of materials and its impact on production volumes.
Based on the data received, conclusions are drawn and appropriate management decisions are made about improvements or cost reductions.