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# Costs

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### Costs

1. 1. NASHVILLE STATE Community College Warehouse & Inventory Management LOGI 1030Costs: Fixed Costs and Variable CostsCost Per Unit and how it is calculated Productivity Calculations 1
2. 2. CostsA sound decision is a decision where only the relevant costs are considered.These are costs that result directly from the decision being made.Irrelevant costs should be ignored. Irrelevant costs are costs that are incurredregardless of the decision being made. So, how do you tell Relevant from Irrelevant costs? Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC) 2
3. 3. Types of Cost Costs Avoidable Costs Unavoidable Costs (Sunk Costs: a cost that has already been spent and can not be recovered)Variable Costs: Fixed Costs: • Avoidable in the short run • Avoidable in the long run • Change with the amount the • Remain the same regardless of company produces (labor, sales, materials, how much the company produces commissions, etc…) (rent, utilities, depreciation, taxes, etc…) Short Run: A period too short for the company to do much about its plant size. Some expenses are fixed. Consider only variable costs. Long Run: A period long enough for the company to change its plant size. All expenses are variable. Consider all relevant costs. 3
4. 4. Types of CostTotal Cost (TC) TC = Fixed Cost (FC) + Variable Cost (VC) TC FC + VC FC VCAverage Cost (AC) AC = = = + Quantity (Q) Q Q Q If the average cost (AC) falls as output (quantity (Q)) increases, the company is experiencing economies of scale. In the short run, economies of scale almost always arise from the existence of fixed cost (FC). Why?? For example: The cost per passenger on a cruise ship decreases until the ship is full. This is because for each additional passenger, the cost of the fixed expenses (salary of the crew, fuel, insurance, etc…) is spread across greater volume (the passengers). 4
5. 5. “CAUTION” However, large volumes may some times result in HIGHER average costs. Why?These diseconomies of scale are due to limitations in production capacitywhich require the company to incur higher expenses due to: Overtime pay Outsourcing Varying away from normal processes Bottlenecks Any others? cpu 5
6. 6. Cost Per UnitCost Per Unit (CPU) is the average cost to produce one unit.CPU considers the following variable costs: Hourly wage rate Overtime rate Components of “Total Payroll” Benefits rate Volume (# units produced) CPU = Total Payroll Units 6
7. 7. So, where do we get this information from? The CPU Report CPU 1.xls 7
8. 8. CPU = Total Payroll Units Let’s calculate the CPU from the CPU report: CPU 2.xlsTotal Hours Paid: 13,810.05x Effective Average Wage: \$18.72 \$258,524 CPU = = \$0.342= Total Payroll: \$258,524 755,151Total Units: 755,151 Productivity 8
9. 9. ProductivityDepartment productivity is the average rate of production of each person assignedto the department.Productivity tells you how efficient the department is at managing its work flow with its available labor resources and work processes.Productivity includes: Total Production Hours All hourly employee hours that are clocked into the department. Includes production based task hours, as well as, non-production based task hours (leads, material handlers, etc…) Units 9
10. 10. We get this information from the CPU Report as well… 10
11. 11. Productivity Let’s calculate Packing productivity from the CPU report: CPU Packing.xls Productivity = Units Total Production HoursUnits = 512,949 512,949 Productivity = = 489.59 1,047.70Production Hours = 1,047.70 11
12. 12. CPU and ProductivityHow can we use CPU and Productivity information? • To determine how efficient your current process are • To determine if your employees are utilized in their highest capacity • To help you discover waste and bottlenecks in your work processes • To determine how efficient your employees are at performing their job tasks • To help you determine if your production standards are too low Throughput 12
13. 13. Production Throughput CalculationIn order to manage any process you need to know how to calculate theproduction/throughput rate of that process.There are four pieces of information required. So long as you have any threepieces you can solve for the fourth. The four pieces of information are: • # of units, lines, cartons, etc… • # of associates • Average hourly associate rate of production • Time (usually in hours) 13
14. 14. Production Throughput ExamplesExample 1: If you have 10 associates, packing 300 units per hour, and there are 8 hours in a shift, how many units can your department pack? 10 300 8 24,000 units _____ x ______ x _______ = _____________Example 2: You have 5,500 lines to pick, there are 4 hours left in the shift, your average production rate is 135 lines per hour, how many pickers do you need? 5,500 4 135 10 pickers (________ / ____) /_____ = _____ _____ Example 3: You have 8,300 units to sort, you have 7 sorters, and they sort at a rate of 200 units per hour, you need to be finished in 4.5 hours. Will you be finished sorting in 4.5 hours? 7 200 4.5 6,300 units _____ x ______ x _______ = _____________ < 8,300 units NO 14 Income Statement
15. 15. Exercise QuestionsYou are the 2nd shift picking supervisor and are very concerned about when you willbe finished picking today’s work. The time is 5:00 pm. The total number of linesleft to pick is 3,150. You have 14 pickers who are picking an average of 132 lines perhour. What time, to the nearest half hour, will you be finished picking?You are the 1st shift Manual Sort supervisor. Your goal is to leave no more than 14,000units remaining to sort before you hand off to the 2nd shift supervisor at 5:00pm. Thetime is now 3:00 pm. You currently have 27,525 units to sort. How many sorters do youneed to achieve your 5:00 pm hand off goal? Average hourly sorter production is 495units per hour.The time is 11:30 am and you are the 1st shift stocking supervisor. The 11:00 am wavejust dropped to the production floor and you have to complete stock demand beforepicking can begin picking the 11:00 am wave. You have 220 stock demand directives.Stockers can pull and stock 48 directives per hour. You have 30 minutes to completestock demand. How many stockers do you need? Income Statement 15
16. 16. The Income Statement Sales - Cost of Sales = Margin - Fixed Costs = Profit 16
17. 17. The Income Statement – In More Detail Sales Cost of Sales Cost of Goods Sold Cost of Returns Freight Obsolete Inventory Variable Costs Payroll Benefits Temporary Payroll Controllable Expenses Workers Comp Utilities Operating Supplies Maintenance Margin Fixed Costs Depreciation RentNon-Controllable Expenses Taxes Insurance Pension Profit 17
18. 18. A Closer Look at ExpensesOperations G&A Bonus Accrual Employment ExpensePayroll * Pension Expense Accrual Workers’Overtime Education and Seminars CompensationHoliday/Vacation pay Travel Rent BuildingBenefits * Auto and Truck InsurancePayroll Taxes Office Equipment DepreciationOperating Equipment Telecommunications Taxes - MiscellaneousUniform Expenses Office SuppliesTemporary Personnel Dues and SubscriptionsOperating Supplies * Sundry PersonalService Fees Copier CostsMaintenance and Repair Computer ServicesRent Equipment Sundry Outside Services Janitorial Supplies and Services Utilities Associate Incentive Postage 18
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