Economical science /10. Enterprise economics

Candidate of economical science Gorelova N. S.

Kostanay economical engineering university named after M.Dulatov

Production cost - efficiency analysis at the enterprise

Production cost - efficiency analysis at the enterprise is based on the usage indicators’ system that reflects a system of objective economic laws in the form of their manifestations in the field of management taking into consideration specificity.

Practical importance of production efficiency rating system is expressing quantitatively the content of its criteria, to reflect production efficiency resources (expenses) in the generalized look.

The necessity of indicators system usage for evaluating production efficiency effectiveness is determined by economic effect and various resources and expenses’ character which is also differ by economic nature, that are not always comparable. Indicators of production efficiency at the enterprise is divided into private and generalizing [1]. Among specific efficiency indicator included the volume and production quality, labor capacity, capital productivity, material return, production cost, etc.

Quantity and quality of made production. These indicators, being productive, fully reflect enterprise purpose realization that is directed to meet all the requirements of market in production. Therefore, reducing the production efficiency category only to its economy would deny defining performance objectives production, the formation of its essence and the criteria.

The majority of authors come to the general opinion that cumulative effect (result) can be presented not only quantity of made production, but also other volume indicators depending on the goals.

So, gross production will characterize the effect of production from the point of view of solving its main task - to create use value; commercial products from the standpoint market need in the production; net product (gross income) - to measure the production effectiveness in terms of reproduction’s two process integration, profit consumption and accumulation; to assess production efficiency from the point of view to meet producer’s interest.

Labour capacity or labor intensity characterizes the efficiency of unit labor requirement in a unit of working time. This is the ratio between the quantity produced and the time spent on it. Labour productivity is the ability of a specific human labour to produce a certain quantity of use values in a unit of working time. The more products made in a unit of working time, or less time spent on it, the higher is labour efficiency. The calculation of labour productivity of certain product’s type is made in physical units. In high – variety manufacturing to calculate labour productivity products are expressed in generalized form which is monetary valuation. To take dimensions of labour input to calculate its productivity duration of working time used.

Development of labour productivity is the most urgent problem that depends the rates of extended reproduction and complete satisfaction of public consumption in the products. Productivity growth is the universal law, that is common for all socio-economic formations. The law of continuous labour productivity improvement is general for all branches of national economy.

Capital productivity shows how efficiently are the costs of past labor was used, materialized in the manufacturing facilities and equipment, primarily in the machines. Capital productivity indicates how many products in terms of money received per unit of value of fixed assets. Material return reflects the last work expenses efficiency usage substantiated in material current assets.

Production cost (cost of 2 tenge per product ) in summarized form indicates the effectiveness of all inputs, shows all the expenses. Production cost is one of important factors and indicator of economical production efficiency. Expenses show the production costs to the commodity producers. They reflect the quality of production activities. Cost reduction is one of the main sources of savings, that extends reproduction on the basis of acceleration of scientific and technical progress.

The given indicators, that characterize the usage of certain types of recourses and expenses, are the main indicator of absolute production efficiency. Every indicator can be divided into some, which will characterize usage of more concrete types of resources and expenses. For example, the indicator of capital productivity is differentiate performance efficiency of usage of certain types of production fixed assets – the equipment, vehicles, etc.; indicators of material return – raw materials, materials, etc

However, if there multiplicity used for specified purposes and acting often differently partial indicators it is important to have one generalized, which would give the most comprehensive rating of production efficiency. In accordance with the main methodical and methodological notes about the production effect (result) and resources (costs) of production outlined above, and also taking into account the requirements of the general indicator of production efficiency in such a composite indicator is the profit – earning capacity or cost effectiveness.

The manager of any enterprise, in his practical activity, should accept a set of various administrative decisions. Everyone accepted decision concerning the price, enterprise expenses, volume and structure products realization, finally affects organization’s production efficiency. Simple and very exact way to define interrelation between these categories is established from the point of profit – earning capacity – define the moment since the enterprise income completely covers expenses.

This type of analysis –is one of the most effective means for planning and enterprise forecasting activity. It helps heads of the enterprises to reveal optimum proportions between variables and constant expenses, the price and realization volume, to minimize enterprise risk. The CVP key elements are the analysis the marginal income, break –even point (BEP), production leverage and marginal margin of safety.

Industrial enterprise marginal income is the difference between the enterprise revenue from products sales (works, services) and direct cost. The value of the marginal income shows the company's contribution to cover fixed costs. There are two ways to define value of marginal income. According the first method from enterprise earnings all the variable cost take away. According second method the value of the marginal income is determined by adding the fixed costs and enterprise profits.

Under the average marginal income comprehend the difference between production cost and average variable cost. Average marginal income reflects the contribution of production units to cover fixed costs and profit. The share of size of the marginal income in sales proceeds or (for a separate product) a share of average size of the marginal income in the goods price is called as marginal income coefficient. [2]

The break even (break - even point) is the indicator characterizing volume of production realization (works, services) is equal to all its cumulative expenses, i.e. it is that sales volume at which the enterprise has no profit, or negative profit. Production leverage is the mechanism of profit control depending on changes in the volume of realized production (works, services). Production leverage (word leverage in translation - lever) is a mechanism for enterprise's profit managing, based on the optimization of fixed costs and variable costs. With its help it is possible to predict the change of the enterprise's profits depending on changes in sales volumes and determine the break-even point activities.

Production leverage is an indicator that helps managers to choose optimum enterprise strategy of expenses and profit management. The size of production leverage can change under influence of price and sales volume; variables and constant expenses; or combinations of any mentioned factors.

Marginal safety is a percentage deviation of the actual proceeds from production sales (works, services) from threshold revenue.

It should be noted that the main condition of the CVP - analysis is the division of costs on fixed and variable. It is known that fixed costs do not depend on the volume production and sales, and variables are changed proportionally to the change in this indicator. The usage of CVP - analysis managers’ practical work helps quickly and efficiently solves many problems; for example, determine the profit margin at different output. CVP - analysis allows finding the most favorable ratio between variable and fixed costs, price and production volume. It is obvious that to achieve growth of profit it is possible to increase the size of marginal income. It is possible to reach it in the different ways: to reduce the selling price and respectively to increase turnover volume; to increase the volume of realization and to lower level of constant expenses; in proportion to change variables, fixed cost and output volume.

Furthermore, the choice of enterprise model behaviour also has a significant influence on value of the marginal income per unit of output. In short, the usage of the marginal income is the key to the solution of the problems connected with enterprise expenses and income, which is production efficiency.

The main feature of efficient management is a degree of the organization's goals achievement. The manager should use resources in an effective way. This means that manager is responsible for the consumption resources that are transferred to his authority and to use in combination, to produce the greatest output or services with less cost. It is important to understand that before the manager constantly faced with the problem of costs cut and maximize growth of firm’s profits. In a market economy, the work of firm’s manager is measured by profit- earning capacity.

Profit is the reward, which the company receives as a result of effective resources usage for product manufacture, if it is sold at market price above cost, and thus creates surplus, which make profit. Part of profits is returned to the firm as working capital for improvement and expansion technology and the growth of the company. The other part is paid to the owners of the company as a reward for the risk, connected with the creation of the enterprise.

In the process of work, manager should always be ready to use new technologies, and improve work, the search new organizational forms. This is necessary not only in production, but also for each level of company management. Person’s absolute efficiency activity is unattainable. But in every case, for each period of development manager should review and adjust the relationship between resources. But when desired efficiency achieved, it remains only for a very short time. The pursuit for absolute effectiveness is endless [3].

The main thing in the effective management is effective business, so efficient business is a business in which the income is clearly exceed the costs with a reasonable degree of risk. It is proved that in the business is important, first of all, the client, rather than products or services, not the image of the manufacturer and/or corporations, companies, not the founders or owners. Therefore, an effective business can and should be measured and valued as goods and services are valued by clients.

References:

1. Enterprise economy / Under the editorship of E.L.Kantora – SPb: St. Petersburg, 2002.-352 pages.

2. Keyler V.A. Enterprise economy: Course of lectures. – M: INFRA-M; Novosibirsk: NGAEU, "The Siberian agreement", 1999.-132 pages.

3. Firm economy: The textbook for higher education institutions / Under an edition of prof. V.A.Shvandara. – 3rd prod. reslave. and additional – M: YuNITI-DANA, 2002. -718 p.