IM111 INDUSTRIAL RELATIONS

Transcription

1 IM111 INDUSTRIAL RELATIONS Cost Analysis

2 What is Cost? Costis the amount of money paid or payable to achieve a specific objective, e.g. the acquirement of materials, property, or services. 2

3 Is Cost Really That Important? Cost, revenue, and profit are the three mostimportantfactors in determining the success of any business. The goal of business is to make money. Cost information is used in economic evaluation Desire to know outcome before making a commitment Need for costand priceestimates 3

4 Cost Analysis for Organizations Revenue must exceed costs for all organizations Business organization Governmental organization Non-profit organizations (e.g. charitable foundation) 4

5 Sources of Cost Total Cost Material 50% Labor 30% Overhead 15% 5

6 Material Cost Is the cost of material included and appearing in the final product. Material includes everything that is used to make a product from the significant to the insignificant. Direct material Becomes part of the product Included in the design Indirect material Used to facilitate manufacturing process Do not become part of the end product Components Ready for assembly Material cost is directly affectedby the production volume 6

7 Labor Cost Is the sum of all money paid to employees. Wages Benefits (e.g. paid vacations and public holidays, meals, insurance, etc.) Payroll taxes Labor refers to the workers or employees within an organization. Direct labor Touches the product Changes or adds value to the product (e.g. workers on an assembly line) Indirect labor Supports direct labor efforts (e.g. maintenance staff) Contributes to the overhead cost Labor cost is directly affectedby the production volume 7

8 Overhead Cost Overheadreferstothecostitemsotherthanmaterialandlaborcosts. Is that portion of the cost that cannot be clearly associated with particular product and must be prorated among all the cost units. The word overhead has a historical legend. In early twentiethcentury shops, the boss would be on the second floor, or over-thehead of the machine tools and workers, thus those costs became known as overhead costs. Overhead cost is not directly affectedby the production volume 8

9 Cost Effect on Production Costs can be classified also based on their effects on the production. Direct costs: arise directly from production Direct material costs Direct labor costs Indirect costs: arise whether production takes place or not Renting costs Administration costs Direct costs are directly affectedby the production volume Indirect costs are not directly affectedby the production volume 9

10 How to Calculate Material Cost? By multiplying the quantity of material used in production by the cost of material per unit. What if the used units of material was not bought at the same price? There are two common methods for determining the value of material cost: First in first out (FIFO) method Last in first out (LIFO) method 10

11 Material Cost Example Units of material have been delivered and added to inventory every month according to the quantities and prices listed in the table below: Date Quantity Price($/unit) February March April May In June, 800 units of material were drawn from inventory and used to produce 160 products. What would be the total and average material cost (using FIFO and LIFO methods)? If each single product requires 5 units of material, what is the material cost per product? 11

12 Material Cost Example: FIFO Method Quantity Price($/unit) Cost ($) , , ,000 Total Material Cost 16,400 Average material cost = 16, = 20.5$/unit Material cost per product = = $

13 Material Cost Example: LIFO Method Quantity Price($/unit) Cost ($) , , ,150 Total Material Cost 16,750 Average material cost = 16, = 20.94$/unit Material cost per product = = $

14 How to Calculate Labor Cost? Labor Cost = Time Wage Time: usually in hours Wage: hourly wage 14

15 Labor Hour It means one worker working for one hour Labor year 52 (weeks per year) x 40 (hours per week) = 2,080hours per year Labor month 2,080 / 12 = hours If 20 labor hours are required, this could mean: 1 worker will consume 20 hours or 2 workers will consume 10 hours each 15

16 Labor Hour and Labor Cost Example Each worker earns $31,200 per year Monthly rate = 31,200/12 = $2,600per month Labor year = = 2,080hours Hourly rate = 31,200/2080 = 15 $/hr If each single product requires 4 labor hours, what is the labor cost per product? Labor Cost per product = 4 15 = $60 16

17 How to Calculate Overhead Cost? All overheads are determined and added together. Then allocated to the products. Examples of overheads: Renting costs Utilities costs (electricity and water) Marketing costs Research and development costs 17

18 Overhead Cost Example Overheads for a company include: Renting costs = 1,000 $/month Utilities costs = 400 $/month Tooling costs = 100 $/month Advertising costs = 200 $/month Insurance costs = 300 $/month Administrative costs = 3,000 $/month Monthly overheads = $5,000 18

19 Overhead Cost Example (Cont d) Given that 160 products were produced in June. Overhead Cost per product = 5, = $

20 Total Product Cost Example Calculate the total product cost (using FIFO method for material cost calculation). Total Cost = Material Cost + Labor Cost + Overhead Cost = = $

21 Practice Question A tires factory is importing rubber from a certain supplier at different prices. The quantities imported and the price in ($/ton) are given in the table below: Date Quantity Price($/ton) January 50 5,000 February 70 5,200 March 60 5,400 April 30 5,300 In May, 150 tons were drawn from inventory and used to produce 3,000 tires. 21

22 Practice Question (Cont d) What would be the total and average material cost (using FIFO and LIFO methods)? If each single product requires 0.05 tons of rubber (material), what is the material cost per tire (product)? Each worker earns $62,400 per year. If each single product requires 6 labor hours, what is the labor cost per tire (product)? If the company overhead cost during May was $250,000, what is the overhead cost per tire (product)? Finally, calculate the total product cost (using FIFO and LIFO methods)? 22

23 Thank You! 23