Production costs, definition and methodologies to analyze and control them

Production costs are one of the items to be analyzed and controlled with greater attention in the management of a company . Beyond their numerical contribution, they also have a strategic value , because they determine the growth potential of the business . In fact, optimizing production costs and creating value around the product with related actions, such as marketing, is essential to be able to produce a profit that allows further investments, which lead the company to growth. It is therefore absolutely a priority to establish an industrial cost control system , which can give the company greater certainty on the percentages of profitability, guaranteeing the possibility of intervening in the event of problems or inconvenience of one of the production phases.

What are the production costs

Production costs include all the expenses that the company has to incur to make a product or service . Two main items should be considered : fixed costs and variable costs.

Fixed costs are those cost items that do not change with changing quantity of the products, such as rent, compensation of employees and collaborators, legal fees. The variable costs are those that change to changing the quantity of the product, such as raw materials and energy consumption. A clarification must be made: even fixed costs, as the conditions of the company change, can become variable. For example, if the aziend to receive more requests for a service or a product, at a certain point you will have to hire more staff. The same goes for rents: if you need more space to be able to produce my product, you will have to increase the rental costs .

The analysis

Production costs have a significant impact on the company's profit, which is why it is important to optimize them. However, optimization does not mean reducing the quality of a product or service, because it saves on raw materials or on staff skills. Production costs must be kept in line with the company mission. For example, if the company value is eco-sustainability, it is important to keep the attention on this aspect, buying raw materials that respect certain standards, with the awareness of spending more, but earning through the customer's trust. In Italy, 30 billion euros are lost every year due to a lack of optimization of systems , such as the absence of digital tools for accounting, which would reduce working times, or the lack of staff training to use new tools. Proposing solutions to amortize costs with innovation is one of the main activities in the analysis of production costs.

Control

Production costs can be controlled with automated management control systems . There are numerous software, intuitive and customizable, which allow you to create targeted reports to analyze specific items of business management, including production costs. A periodic analysis of these expenses makes it possible to identify the margins for action on optimization, perhaps aiming at the introduction of digital tools that speed up production methods. Keeping company data under control is the main way to act promptly in the company organization. The economic crisis triggered by the Covid-19 epidemic has clearly demonstrated how important it is to know how the company is doing and what its potential is, to face the emergency in a more serene way. It is therefore necessary to continue in this direction if we want to keep competitiveness on the market high.

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The article Production costs, the definition and the methods to analyze and control them comes from ScenariEconomici.it .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/costi-di-produzione-la-definizione-e-le-metodologie-per-analizzarli-e-controllarli/ on Mon, 12 Apr 2021 05:45:35 +0000.