Costing 102 PDF

Costing Elements of Cost: Labor Labor cost is a crucial factor in the overall cost of goods and services. It encompasses the expenses associated with employing workers, including wages, salaries, benefits, and taxes. Understanding the components of labor costs is essential for businesses to make in...

Costing Elements of Cost: Labor Labor cost is a crucial factor in the overall cost of goods and services. It encompasses the expenses associated with employing workers, including wages, salaries, benefits, and taxes. Understanding the components of labor costs is essential for businesses to make informed decisions about pricing, production, and profitability. Defining Labor Costs 1 Compensation 2 Benefits Wages, salaries, bonuses, Health insurance, and commissions retirement plans, paid represent the direct time off, and other payment to employees for benefits are essential to their work. attracting and retaining employees. 3 Taxes 4 Indirect Costs Employers are These costs include responsible for recruitment, training, withholding taxes on and administration, and wages, such as income are essential for tax, Social Security, and managing and developing Medicare. the workforce. Direct vs. Indirect Labor Direct Labor Indirect Labor Direct labor is directly involved in the production of Indirect labor supports the production process but goods or services. isn't directly involved in creating goods or services. Manufacturing workers Maintenance staff Sales representatives Supervisors Customer service agents Human resources personnel Factors Influencing Labor Costs Industry and Location Skill Level and Experience Labor costs vary significantly by industry and Highly skilled and geographic location. experienced employees command higher wages. Demand and Supply Government Regulations When demand for labor exceeds supply, wages tend Minimum wage laws, to rise. overtime rules, and other regulations can influence labor costs. Hourly Wages and Salaries Hourly Wages Salaries Paid based on the number of Fixed amount paid per year hours worked or pay period Common for non-exempt Common for exempt employees employees Employee Benefits and Taxes Health Insurance Retirement Plans Paid Time Off Taxes Employer-sponsored Matching contributions Vacation, sick leave, and Payroll taxes, such as health insurance can be to 401(k) plans are holidays contribute to Social Security and a significant cost. common. labor costs. Medicare, are required by law. Productivity and Efficiency 1 Training and Development Investing in employee training can enhance skills and productivity. 2 Process Optimization Streamlining workflows and eliminating inefficiencies can reduce labor costs. 3 Technology Adoption Using technology to automate tasks can increase efficiency and reduce labor requirements. Strategies for Controlling Labor Costs Optimize Staffing Levels Negotiate Competitive Wages Ensure the right number of employees are working at the Offer competitive compensation right time. packages to attract and retain top talent. Manage Overtime Outsource Non-Core Functions Minimize overtime hours to reduce labor costs. Consider outsourcing tasks that are not core to your business. Elements of Cost: Overhead Overhead costs are essential expenses that businesses incur to support their operations. They are not directly associated with producing goods or services, but are crucial for maintaining the business. What is Overhead? Overhead costs are indirect expenses that businesses incur to support their overall operations. These costs are not directly tied to the production of goods or services. Overhead is an essential element in calculating a product's true cost. Rent and Utilities Salaries and Benefits Rent, electricity, and internet are examples of Salaries for administrative staff, insurance, and overhead costs that support a business's physical other benefits are overhead expenses that support space and operations. the business's human resources. Marketing and Advertising Insurance and Legal Fees Spending on marketing campaigns and advertising Various insurance policies and legal fees are is an overhead cost that supports the business's overhead costs that protect the business from risks sales and customer acquisition efforts. and ensure legal compliance. Types of Overhead Costs There are various categories of overhead costs, each with its own purpose and impact on a business. 1 Administrative Costs 2 Marketing and Sales Costs These cover administrative tasks, such as salaries for These include advertising, promotions, sales managers and office staff, rent for office space, and commissions, and marketing research expenses. insurance. 3 Operational Costs 4 Financial Costs These cover the day-to-day running of the business, These include interest payments on loans, bank such as utilities, repairs, and maintenance. charges, and fees for financial services. Fixed vs. Variable Overhead Overhead costs can be classified as fixed or variable, depending on their relationship to the business's activity level. Fixed Overhead Variable Overhead These costs remain constant regardless of the volume These costs fluctuate with the production or sales of production or sales. Examples include rent, salaries, volume. Examples include utilities, supplies, and and insurance premiums. commissions. Allocating Overhead Costs Allocating overhead costs is the process of distributing them to various cost objects, such as products, departments, or projects. 1 Identify Cost Objects The first step is to identify the cost objects to which overhead costs will be allocated. 2 Select Cost Drivers Next, businesses choose appropriate cost drivers that influence the allocation of overhead costs. 3 Calculate Allocation Rates Allocate overhead costs to the cost objects based on the predetermined allocation rates. Overhead Cost Reduction Strategies Reducing overhead costs is essential for improving profitability. Businesses can employ various strategies to achieve this. Negotiate Better Rates Businesses can negotiate lower rates for utilities, rent, and other overhead costs. Streamline Operations Identify and eliminate inefficient processes that contribute to unnecessary overhead costs. Automate Tasks Automating tasks, such as accounting and marketing, can reduce manual labor and associated overhead costs. The Importance of Overhead Management Effective overhead management is crucial for businesses' success, as it directly impacts profitability and financial performance. Improved Profitability Reduced Operational Costs Increased Efficiency Enhanced Competitiveness Optimizing Overhead for Profitability Businesses can optimize their overhead costs to achieve maximum profitability and sustainable growth. Invest in Technology Investing in technology can automate tasks, streamline processes, and reduce overhead costs. Optimize Resource Allocation Allocate resources efficiently to minimize waste and reduce unnecessary overhead expenses. Monitor Costs Regularly Regularly track and analyze overhead costs to identify areas for improvement and cost reduction. Methods of Costing Several costing methods exist, each tailored to specific business needs and product characteristics. 1 Job Costing Costing method used for unique products or services, such as construction projects or custom software development. 2 Process Costing Costing method used for mass-produced goods or services, such as gasoline or bottled beverages, where costs are averaged across units. 3 Activity-Based Costing A costing method that assigns costs to activities and then allocates those costs to products or services based on their consumption of activities. Job Costing 1 Definition Job costing is used for unique products or projects where costs can be specifically identified with each job. 2 Example Construction companies often use job costing to track expenses related to individual building projects. Process Costing Definition Process costing is used for mass production of identical goods where costs are averaged across units produced. Example Food manufacturing companies typically use process costing to track costs for producing large quantities of products like cookies or cereal. Activity-Based Costing (ABC) Key Idea ABC aims to assign overhead costs to products or services based on the 1 activities they consume. Benefits 2 ABC provides more accurate cost information, leading to better decision-making and improved profitability. Steps 3 Identify activities, assign costs to activities, determine cost drivers, allocate costs to products. Traditional Costing vs. Activity-Based Costing Traditional costing and activity-based costing (ABC) differ in how they assign costs to products or services, leading to different insights into profitability. Traditional Costing Activity-Based Costing Allocates overhead costs based Identifies and assigns costs to on volume-based measures, specific activities that drive such as direct labor hours or those costs, such as setup, machine hours. inspection, or material handling. Can lead to inaccurate cost Provides more accurate cost allocations for products that allocations by considering the consume resources differently, actual activities required to even if they have similar produce each product or production volumes. service.  Just-In-Time (JIT) Manufacturing: A Lean Approach JIT is a production strategy where materials are purchased and goods are produced only when needed. This minimizes waste and maximizes efficiency. JIT focuses on streamlining processes, reducing inventory, and eliminating unnecessary steps to optimize production. Key Objectives of JIT Manufacturing 1 Minimize Waste 2 Reduce Inventory 3 Improve Quality Minimize waste of resources, Keep minimal inventory on Focus on producing high- time, and effort. hand, reducing storage costs quality products to eliminate and minimizing obsolescence. rework and defective units. Elimination of Waste and Inefficiencies Overproduction Defects Producing more than what's Quality defects result in needed leads to excess rework and waste, inventory and storage costs. increasing production time and costs. Inventory Waiting Excess inventory ties up Delays in production can capital and increases lead to idle resources, lost storage, handling, and time, and missed deadlines. obsolescence costs. Inventory and Production Optimization Pull Systems Materials are pulled through the production process as needed, 1 eliminating unnecessary stockpiles. Kanban 2 Visual signals, like cards or containers, trigger the production or procurement of materials. Visual Management 3 Clear displays and tracking systems provide real-time visibility into inventory levels and production progress. Improved Quality and Customer Satisfaction Reduced Defects Faster Delivery Increased Customization JIT's focus on quality control and Reduced lead times and responsive JIT allows for more flexibility and continuous improvement leads to production meet customer needs customization to meet specific fewer defects. more effectively. customer requirements. Financial Benefits of JIT Implementation 25% 15% 10% Reduced Inventory Costs Lower Production Costs Improved Profitability Lower storage, handling, and Minimized waste and optimized Higher efficiency and reduced costs obsolescence costs result in processes reduce overall production lead to improved profitability and significant savings. expenses. better financial performance.