Cost can be defined as the cost of the enterprise for the production of a product. The manufacturing process of even the simplest product, as a rule, requires a wide variety of costs. In addition to the raw materials and materials from which a particular product is directly produced, it is also, of course, payment for human labor, rental of premises, taxes, insurance, etc. In this regard, the cost analysis is a complex process involving the study of the mass of various factors affecting the final result, in order to reduce it.
In general, all costs can be divided into direct and indirect. Direct costs include all costs that can be directly attributed to a specific product, for example, the labor of workers producing a specific part. In this case, it is quite simple to determine in which place the costs of the enterprise can be reduced. By analyzing the production process of a specific part, we can determine whether it is possible to make the transition to cheaper raw materials, reduce energy costs, optimize the labor activity of workers of the enterprise, reduce their number, etc. Each specific situation is considered separately, and a decision is made to implement certain measures in this direction, then a general analysis of the cost of production is carried out and it is checked how various factors interact with each other. For example, would a reduction in energy costs harm the quality of work of workers.
However, not in all cases this scheme is applicable. For example, we cannot carry out an analysis of the cost of livestock production in this way. In this case, it is quite difficult to influence the cost by changing direct costs, since the life span of the animal is a factor that is poorly predictable, which means that it will be unreasonable to approach the solution of the problem exclusively in a mathematical way.
Therefore, most likely the company should optimize not direct costs, but indirect ones. These include costs that are not directly related to the production process, but indirectly affecting it. The most typical example is the cost of maintaining an office and paying salaries to managers of an enterprise. Quite often, it is indirect costs that are the main reason for excessively high cost. Especially they should be paid attention to when fixed costs (another name for indirect costs) exceed variable costs (direct). In this case, the company faces the threat of significant losses if sales volumes fall.
When analyzing the cost of your products, analyze each item of expenditure, determining the economic effect of costs. For example, if you are analyzing the cost of crop production, and in the cost items you have to rent warehouses for storing ready-to-sell crops, then you need to get ahead if these warehouses are at their maximum, or a significant part of the space remains free. In the latter case, it is necessary to get rid of part of the area. The same applies to any other varieties of costs.
At the same time, try not to overdo it. Remember that the analysis of the cost of production only shows the weaknesses of the process, and is not a guarantee of the absolutely right decision. After all, it is extremely important, while reducing costs, not to lose in the quality of the product, and also not to lose customers due to the failure of the marketing policy. Each decision should be made on the basis of a comprehensive analysis of all the pros and cons.