Chapter 1

MANAGEMENT COSTS

by josavere

1. SPECIAL FOR MANAGERS AND EXECUTIVES OF TRADE,
SALES AND PRODUCTION

No system of costs allows to calculate the exact cost of product  or a service. One is to find the best approach, using the suitable procedure but for the particular case.

The costs has  three  basic funtions:

1. Constitute the  base to increase productivity.
2. Serve like tool of fixation of prices.
3. For fiscal effects.

Headings almost perfectly quartiles exist generally; those that we called variables, that  change based on the produced units (variable cost).

Others in general, also are let quantifiable with high degree of precision: the cost fixed ( appear based on the time).

To have an infrastructure  implies a cost fixed of the period and other resultants of the management strategy with immense responsibility in the long term (investigation and development, positioning, qualification of the human resource and environment preservation).

The systems of costs dedicate  great part of the efforts to the distribution of fixed part of the indirect costs of manufacture, using an arbitrary and always debatable resource, example: the cost by square meter depends on the part of the premises where this locating; actually for allocation, all have the  same value, etc.

In the long run, never they are obtained so yearned for precision, but much possibility of controversy.

Starting off of the absolute certainty of the periodic debit (fixed cost and expenses) we can define a quota of contribution by monetary unit sold. (%Pf)

For it we have two parameters:

Note: a factor of safety must settle down to cover the risk. For example: to assume that the budget of sales will be fulfilled in a 90%.

In these conditions the following equation considers:

 P: Sale price V: Variable costs %PF: % of price to cover the fixed costs %PU: % of the price for the utility

The profit margin (%PU) depends on the line (milk cows, stars, dogs and dilemmas).

The management of Trade, as profit center must be responsible for numbers of operational benefit previously approved by presidency, which will serve as base for evaluation of the management.

For the handling of the profit is important prepare a matrix in Excel (with macros) that allows to make simulations before making official the decisions and elaborate proposal of point of reviewed balance (josavere).

Obvious, a program so easy to understand and to apply in regard to its simplicity has a very high price: planning and administration by responsibility centers. It implies a discipline of permanent application; a consisting of exercise the sustenation of reasons to ask for a budgetary game for the period in exchange for obtaining objectives subordinated to the general plan of the company, the generation of value.

Remember the basic concepts:

Centers of responsibility: characterized for a mission that to fulfill and a director or person in charge of its execution. Three types of responsibility centers exist:

1. Centers of costs: respond for the cost of producing or or of serving fits within the requirements of the company.

2. Centers of profit: amounts of sales and margins of profit; work by the profit of goals combining;  can be strategic units of businesses.

3. Centers of investment: authorize investments in the measurement that  technical studies demonstrate that  contribute to obtain the general plan. They combine income and outcome of cash and relate them to the cost of capital of the organization.

What matters at heart, is that all debit which is registered has a person in charge, that must act like computer of the cost, indicating the center of corresponding cost.

The countable system has the inescapable responsibility to register the respective games, periodically to accumulate and to present (monthly) the relation between the budget and its execution, which will serve as base to take remedial actions.

The result statement (monthly) must appear indicating the variations with explanatory note that let  the corrections necessary  to separate to us from the objectives of the general plan, making specific in terms of the indicators that  show the control board, which are of three types:

1. Strategic: high level, centers of investment.

2. Performance: centers of profit and centers of costs.

3. Pursuit: centers of services (human development, computer science, quality, costs, accounting, etc.)

When finishing the monthly exercise, calculates the real position (%PR) with base in the net sales and it is compared with the initial number (%PF).

Example:

Game that would go to reduce against the utility like variation negative in the earnings statement.

 Fixed costs 2.000- Recovered fixed costs 1.900 Game to recover 100

For the following period the possible efforts for besides fulfilling the quota must be programmed corresponding to the exercise, to recover lost the accumulated ones.

The overcosts by negative variations in raw material, manual labor and quota of costs and fixed expenses, affect the result of the company and do not have  to be transferred to the price;  represent inefficiencies that are due to correct.

• It forces to reflect I exceed the expenses of fixed type and the advantages to occupy the plant to avoid the overcosts of idle capacity.

• It is very dynamic and it allows the periodic knowledge of the effects of not fulfilling the budget, contributing to the awareness that it requires to him to enter the planning discipline.

• It forces to measure with high degree of precision the costs and variable expenses and to maintain them under strict control to avoid wastes that affect the result.

• The method is very simple and easy to understand and to calculate.

Difficulty practical to separate costs and expenses in fixed and variable. An exercise must be done careful using the aid of expert executives affluent of the business.

The total cost of the product is disturbed in three elements :

a. Cost of materials: in general terms, all the companies of a same country are equaled as far as their value of acquisition. The differences (sometimes of bottom) are marked in aspects like:

• Country of origin
• Logistic of transport
• Tariffs
• Others
• For effects to make comparisons it is important to enter to verify the price in makes for the particular case and competing companies which allows us to establish if we have advantage or disadvantage as soon as that element of the cost, which must be expressed like percentage of the total cost.

b. Manual labor: a similar analysis allows us to establish the value of the heading in the different countries having in roadside ditch the pertinent legislations in the countries in where it operates the competition.

For the particular case  must analyze the factors that affect the value hour in agreement with the conventions or pacts that regulate the labor relations.

What matters hour in terms of units per minute (or minutes by produced unit) is the production - multiplied by the value of the minute.

Of this form are establish the percentage and participation of the manual labor in the total cost.

Both previous elements of some form are responsibility of the production areas and financier.

c. General costs of manufacture: in highest proportion  are fixed costs and its application in agreement with the volume of production represents the fixed average cost, which depends obvious, of the efficiency of the plant but it shares to a great extent with the level of occupation of the plant capacity, resultant of the trade management.

Of some form, in administrative terms, the fixed average cost is trade responsibility if the plant operates in efficient form.

The fact that it is not had but occupied the plant, although increases in price the cost, is a reality for effects of the result, but of no way the sale price is due to affect to quote new businesses that allow the total use of the installed capacity.

 Calculate of SCO (josavere) A. Costs Fixed (%) B. Use of Plant (%) C. Average Cost Fixed (%) (A/B) Coefficient of  overcost(C-1) % 100 5 20.00 19.00 100 10 10.00 9.00 100 15 6.67 5.67 100 20 5.00 4.00 100 25 4.00 3.00 100 30 3.33 2.33 100 35 2.86 1.86 100 40 2.50 1.50 100 45 2.22 1.22 100 50 2.00 1.00 100 55 1.82 0.82 100 60 1.67 0.67 100 65 1.54 0.54 100 70 1.43 0.43 100 75 1.33 0.33 100 80 1.25 0.25 100 85 1.18 0.18 100 90 1.11 0.11 100 95 1.05 0.05 100 100 1.00 0.00

COEFFICIENT SCO (josavere) MEASURES THE PERCENTAGE OVERCOST OF THE FIXED AVERAGE COST BY IDLE CAPACITY.

4. ANALYSIS OF  THE RESULTS STATE

A. A monthly meeting must take place to study the turn out and to look for theclear explanation, that it serves as base to make decisions. It is disturbed in three blocks :

a. Income: the  trade and sales manager must explain the sales, the margin of contribution (price - variable costs) and the mixture of sales. For it he requires permanent information on the changes of prices of raw materials.

b. Cost of produced merchandise: it is explained based on the performance of the plant as far as occupation level, lost, reprocesos times, suitable use of materials, extra hours, among others. It must appear like annexed.

c. Cost of the sold merchandise: discord with the countable model calculates that is used in the particular case adding to the theoretical cost the variations, or are favorable or unfavorable.

B. The proposal consists of adding to the periodic reports, the data of the previous months and the accumulated ones to establish comparison parameters.

It is complemented with indicators of the annex, which show the causes that inflict casualties or reduce the profit.

The procedure consists of a careful observation of each one of the headings:

• Cost of raw material
• Cost of  manual labor
• Generals cost of manufacture
• Expenses of sales

The person in charge of each one of the previous headings  indicate the cause of the variation and the action to follow. All cost must have an authorized computer, that responds before the presidency with base in the numbers of the control board.

5. COMPLEMENTARY INFORMATION FOR THE RESULT STATEMENT

A. NUMBER OF PEOPLE IN PLANT: is equivalent to I number independently of people occupied in production of the office. Data provided by administrative division.

B. EXTRA HOURS (millions ): data of list.

C. PROGRAMMING IN KILOS / DAY:  is equivalent to sum of programmed kilos divided by the number of working days of the month.

D. PRODUCTION IN KILOS / DAY:  way similar to the previous one. The kilos given by production are added and they are divided by the number of working days.

E. PRODUCTION INDEX / PROGRAMMING: sample if the production advances or not the programming rate. It are expressed in percentage.

F. PRODUCTION / PERSON / DAY: it is equivalent to the number of production of the month divided by I number of days and this result is divided by I number of people who toiled in the plant. It are expressed in kilos.

G. RELATION OF INDIRECT / DIRECT:  indicates the proportion of indirect costs by each dollar paid by raw material and direct manual labor. A percentage is expressed as I number or.

H. LOST TIMES IN HOURS:  is equivalent to the total of hours - man not used in the labor day of the period independently to reason that he generated it. (Lack energy, lack of orders, incapacities, etc.)

I. LOST TIME IN MEN: if each worker must toil eight (8) hours daily, multiplying by I number of days of the month is posible calculated the hours that had to work. Dividing the total of lost hours by the hours of a worker and calculated equivalent in vacated people the all month; it is equivalent to say “exceed” (theoretically). This heading requires a meeting with the people in charge to make an analysis careful.

J. % OF WASTE: data provided by production.

K. % OF RETURNS (losses): data provided by quality.

L. % OF FULFILLMENT OF ORDERS: indicates the percentage of orders that exceeded 95%.

M. USE OF PLANT:  indicates the percentage relation between the real production and the total capacity in kilos/day. Number provided by production.

N. FIXED AVERAGE COST: the fixed costs are caused as it spends the time. To greater amount of units produced in the period, minor the fixed average cost.

O. INVENTORY IN PROCESS: data provided by accounting.

P. FINISHED PRODUCT INVENTORY: data provided by accounting. In the measurement that exists a perfect coordination between sales, offices and production, the number must be very low. It are expressed in Million.

Q. DAYS OF INVENTORY:  is the same number previous but expressed in terms of sales per day to the rate of the month in observation.

R. RAW MATERIALS: expressed countable number in Million .

S. DAYS OF RAW MATERIALS:  is the equivalent one to the heading previous but expressed in days to the rate of production of the month.

T. OBSOLETE INVENTORY: expressed in millions; it is equivalent to sum of the merchandise and raw materials with more than six months without movement. Data provided by administrative management.

U. TRM:  is an official data equivalent to the value in American dollar.

V. EXPENSES OF ADMINISTRATION: equivalent to % of administrative expenses in relation to the net sales. W. EXPENSES OF SALES: indicates % of the net sales that was applied to the function of sales.

X. TOTAL SALES BY PERSON / DAY: if all person who acts some as in the Company projects to the sales (directly or indirectly), the index shows the amount of dollars that invoices by person.

Y. SLOW PORTFOLIO: expressed in millions of dollars; it indicates the portfolio with more than 90 days of won. Data provided by contraloría.

Z. FINANCIAL EXPENSES: number that is extracted of the accounting, for its analysis requires the cash flow o of the period.