Control Cost essay
Introduction
This paper posits that in making decisions to control variable costs there are trade-offs that are inevitable but a choice must be made if higher profits is desired. This paper will attempt to prove this thesis in the case of JetSet Travel, Inc. (JTI), a company which develops, manufactures, and sells a wide range of travel-related equipment and products. As a manufacturing company incurs variable costs in the form of direct materials and direct labor and is faced with reality that variable cost increases with production.
Analysis and Discussion
The nature of variable cost. Variable cost normally takes the form of direct materials and direct labor. This cost normally directly varies with production volume which means that as company increase production, the company also increases variable cost also. Logically, if the company limits or controls production, it also controls variable cost. To control production however, is to control sales and to control sales is to control profits. Sound business decision techniques therefore require that variable cost could not just be arbitrarily controlled since this may affect revenues and eventually profits.
How to control variable cost? Controlling variable cost must need sacrifice increase in revenues. It could thus be understood that a company is required to incur variable cost if it wants to earn profits but in order to earn profit the variable cost for production of the company’s products must not be too big as to cause the company no profits or losses. The better question that should be resolve is this: At what level of production should the company continue producing given a certain percentage of variable cost to revenues that would cause the company to earn profits still? The theoretical answer to the question is that production level should be at least above the break even point, where total cost equals total revenues. It should be noted that the answer to the question assumes a certain percentage of total variable cost to sales that is not changing regardless of the level of production. It could thus be argued that variable cost could still be reduced in relation to revenues but this could increase fixed cost.
Decreasing variable cost while increasing fixed cost would be a better option if bottom line figures or net profits in relation to revenues would be higher than maintaining present relationships of variable cost to revenues. To increase fixed cost means increasing cost that would not vary with production and this could take the form on investing in equipments utilizing better technology. To illustrate, a business could purchase an equipment to replace manual labor in the factory. Replacing work hours of laborer will definitely reduce the number of laborers in the factory but the cost of depreciation which is fixed cost will increase because equipment takes the nature of long-term asset and depreciation will be incurred regardless if the factory produces or not. This set of plans could be integrated in the budget (Businesstown.com, 2007) to enhance control attainment of control of cost. Read about variable costs for pharmaceutical companies
Conclusion
To control variable costs is not easy as deciding not to spend it. In business, the company is expected to use assets and resources and incur liabilities for the business and corresponding expenses and costs are necessary results. However, in so spending cost and expenses, the company expects to earn revenue above these cost and expenses. It is therefore logical that the cost should be used in order to have revenues. Striking a balance, therefore, between variable and fixed could be resorted to increase profitability. Assuming that demand for company products will continue, I recommend purchasing equipments using better technology that could reduce direct labor cost. However, as a word of caution, the risk of my recommendation is that it may increase fixed cost and which could be affect the company’ profitability if demand for company’s products will slow down.
Reference
- Businesstown.com (2007) Accounting – Purchasing/Cost Control: Using Your Budget to Control Costs, {www document} URL http://www.businesstown.com/accounting/slashing-budget.asp, Accessed June 2, 2007
