Recently, there has been a lot of talk about variable degressive costs. This is a concept that is increasingly used in business. Check out what you need to know about it.
What are degressive variable costs? Definition of the term
Degressive variable costs are nothing more than costs that decrease as the scale of production increases. They are very important for any businessman, because they allow to reduce the cost of production. Degressive variable costs are very important for any business, because they allow to reduce production costs. Thanks to them, it is possible to increase the productivity and efficiency of the enterprise. This is very important for the development of any company.
What is included in variable degressive costs?
Degressive variable costs are costs that change as production increases. These are costs of materials, energy, personnel, etc. Degressive variable costs can be considered in two ways. The first is that these costs are fixed in relation to units of production. The second is that these costs decrease as production increases.
Degressive variable costs – examples
Degressive variable costs (SVCs) are costs that decrease as the volume of production increases. They are typical of industry and manufacturing. Degressivity of variable costs is rooted in the law of scale and the law of cost allocation. The law of scale says that as production increases, the unit cost of production decreases. The law of cost allocation says that production costs are divided into fixed and variable costs. Fixed costs are costs that do not change as production increases (e.g., employee wages). Variable costs are costs that change as production increases (e.g., raw material costs).
Degressive variable costs are important for companies because they reduce production costs. Companies can use the law of scale to reduce production costs by increasing production volume. The law of cost sharing allows companies to reduce costs by reducing variable costs.
