What is cost efficiency?

Any economic resources are limited, and some of them, such as oil, land, metal ores, gas, coal - are not reproduced at all. Therefore, it is extremely important to use resources efficiently.

In the most general sense, cost-effectiveness is a cost-to-performance ratio. High efficiency is achieved with the growth of results relative to cost reduction.

The results of economic activity are embodied in products that satisfy needs, and costs are directly related to the use of resources. Accordingly, the economic efficiency can be determined by the following formula:

Efficiency of production = the number of units of the created product divided by the costs of production resources.

For example, using this formula, you can compare the efficiency of using labor in two enterprises that produce the same product. At the first enterprise, 15 employees create 1200 units of the product, and on the second - 25 employees make 1800 units. According to the formula, the efficiency in the first case will be 1200/15 = 80 units, and in the second - 1800/25 = 72. It is taught that at the first enterprise labor resources are used more efficiently.

Economic efficiency is common (absolute) and comparative.

The overall economic efficiency equals the profitability of production. The main indicator of profitability (or profitability) is the amount of profit, which is per unit of costs.

Comparative economic efficiency is expressed in the coefficient of profitability, which is achieved for certain periods of time, for example, for a year or for a quarter.

In any business activity, the economic efficiency of the project is important. It is expressed in the ability of the company to produce as much as possible of good quality products with minimal costs and to realize this product at the lowest cost. The evaluation of the economic efficiency of the project consists of several stages:

1) Analysis and evaluation of investment costs is the calculation of the project's needs in the core and working capital, in financing at various stages of its development and the investment cycle.

2) Analysis and evaluation of current costs - is the creation of cost estimates, the definition of the current cost of production or services, profitability, return on capital, profitability and financial payback of the project.

Economic efficiency can be estimated both for each resource separately, and for all resources in total.

If we substitute the number of employees who participate in production in the denominator of the above efficiency formula, then we get an indicator of labor productivity.

If you take into account the number of units used capital (for example, machine tools), then you can calculate the return on capital. And if the land used for agricultural production is used, then it will be a question of counting the yield (that is, how much of the product was harvested from one hectare).

In order to evaluate the efficiency of all production resources, it is necessary to have indicators of monetary measurement of all resources, having combined which, we will receive total costs.

The total production efficiency directly depends on the maximum utilization of the attracted resources. Firms that use resources worse than their competitors will not be able to reimburse their costs at the price that has been set on the market. Accordingly, they will be forced to withdraw from this sector of production. That is, economic efficiency is provided in a more competitive market environment. Entrepreneurs are forced to look for more and more ways to improve the efficiency of their projects by increasing the efficiency of using their production resources and reducing overall production costs.