Debitoor's accounting dictionary
Economies of scope

Economies of Scope - What are economies of scope?

Economies of scope are when certain economic factors make manufacturing different products together more cost effective than producing them separately (either by two separate manufacturing processes, or by two different suppliers).

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So how do economies of scope work exactly?

Economies of scope normally work the best when products are all within the same product category (e.g. healthcare, food industry), this is because certain aspects of the manufacturing process can be shared.

As examples- in healthcare, a company that makes combs as well as disposable razors can share some of the plastic manufacturing elements to lower their costs or setting up an entirely separate manufacturing process.

Likewise, it would be cheaper for a fast food company to produce burgers and fries together rather than separately because they can share production facilities as well as storage space and transport means when getting it to either their own restaurants, or supermarkets.

For industries where a range of things that fall into the same category aren't produced by the one company, another route is to merge or buy another company that makes the product you are lacking and to integrate them.

What are the advantages of economies of scope?

There are a few advantages gained when economies of scope is achieved - most namely:

  • Being able to adapt to the demand of the market, diversifying production where need be when demand is higher for one product over the other
  • Less waste, meaning the production process is more efficient and environmentally friendly when it comes to materials.
  • Lower training costs because staff don't have to be trained on so many different types of production methods, leading to a more efficient workforce.
  • Lowever overhead costs over all.

Economies of scope and economies of scale

Quite often, the two terms economies of scope and economies of scale get confused - the simplest way to remember the difference between them is that economies of scope refers to products from the same category making production cheaper, whereas economies of scale refers to one product that becomes cheaper to manufacture due to manufacturing processes or negotiations with suppliers.

Economies of Scope and Debitoor

Although there's no specific feature explicitly dealing with economies of scope within Debitoor, you can keep track of your assets and expenses to see how you're doing - factoring in that your costs will lower as you go along once economies of scope (if applicable) have been reached.

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