Question

Select a product and identify the fixed and variable costs of producing the product. If you were responsible for managing the costs, how would you reduce them in order to increase profitability?

Please give 1 or two examples

Answer 1

Product can be taken as COLD DRINK CAN-

Variable cost - It will include expenses which changes with change in output like direct material, direct labour, variable factory overhead, variable administrative overhead etc.

FIxed Cost - It includes expense which dosnt changes with the change in output like Fixed rent premises, machinery ; Fixed component of electricity charges, Permanent employee etc.

Various tool for managing the cost are -

• Cost reduction by putting control on wastages and break out of machinery
• Research and development in design of the product.
• Identify various supplier providing same kind of material in the market i.e. Material control.
• Budget can be prepared and thereafter variance analysis can be performed. It involves two techniques Budgetary control and standard costing.

Example - Company is buying CAN material from XYZ ltd at 2 $ now the purchasing manager came to know that it is available at 1.2 $ from TQM ltd however there will an additional cost of transportation i.e. 0.5 $. The total cost of buying CAN material from TQM ltd will be 1.8 $. So buying from TQM ltd is more beneficial.