1. Costs for top management

Chapter 1


by: josavere


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

1. Constitute the base to increase productivity.
2. Serve like a 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 a 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 a 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 many possibilities 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: assume that the budget for sales will be fulfilled by 90%.

In these conditions the following equation considers:

P: sale price
V: variable costs
%PF: % of the 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 a profit center, must be responsible for the numbers of operational benefits previously approved by the presidency, which will serve as a base for evaluation of the management.

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

Obviously, 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; consisting of exercising 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 to the cost of producing or of serving that 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 obtaining the general plan. They combine the income and outcome of cash and relate them to the cost of capital of the organization.

What matters at heart, is that all debt that is registered as a person in charge must act as the computer of the cost, indicating the center of the 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 a base to take remedial actions.

The resulting statement (monthly) must appear indicating the variations with an 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, calculate the real position (%PR) with base in the net sales and it is compared with the initial number (%PF).


A game that would go to reduce against the period profit like variation negative in the earnings statement.

Fixed costs
Recovered fixed costs
Game to recover

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 overcoats 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 me to reflect I exceed the expenses of fixed type and the advantages to occupying the plant to avoid the over costs 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 him to enter the planning discipline.

  • It forces measure with a 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 calculate. 


Difficulty practical to separate costs and expenses in fixed and variable. An exercise must be done carefully 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 the same country are equaled as far as their value of the acquisition. The differences (sometimes of bottom) are marked in aspects like:

  • Amounts to buy
  • 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 advantages or disadvantages as soon as that element of the cost, which must be expressed like a 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 a roadside ditch the pertinent legislation in the countries 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/unit produced) is the production - multiplied by the value of the minute.

Of this form is to establish the percentage and participation of manual labor in the total cost. Both previous elements of some form are the responsibility of the production areas and financiers.

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, on 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 an inefficient 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, 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. fixed costs  (%) B. use of plant (%) C. average  fixed cost (%) (A/B)
100 5 20.00
100 10 10.00
100 15 6.67
100 20 5.00
100 25 4.00
100 30 3.33
100 35 2.86
100 40 2.50
100 45 2.22
100 50 2.00
100 55 1.82
100 60 1.67
100 65 1.54
100 70 1.43
100 75 1.33
100 80 1.25
100 85 1.18
100 90 1.11
100 95 1.05
100 100 1.00




A monthly meeting must take place to study the turnout and to look for a clear explanation, that it serves as a 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 in the 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, reprocess times, suitable use of materials, extra hours, among others. It must appear 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. 

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 careful observation of each one of the headings:

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

The person in charge of each one of the previous headings indicates the cause of the variation and the action to follow. All costs must have an authorized computer, that responds before the presidency based on the numbers of the control board. 


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

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

C. PROGRAMMING IN KILOS / DAY: This is equivalent to the 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 is 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 is 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 - a man not used in the labor day of the period independently to reason that he generated it. (Lack of 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 possible to calculate the hours that had to work. Dividing the total of lost hours by the hours of a worker and calculated equivalent in vacated people 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 relationship between the real production and the total capacity in kilos/day. The number provided by production.

N. FIXED AVERAGE COST: the fixed costs are caused as it spends the time. To a 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 perfect coordination between sales, offices, and production, the number must be very low. It is 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 some 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 the American dollar.

V. EXPENSES OF ADMINISTRATION: equivalent to % of administrative expenses in relation to net sales. W. EXPENSES OF SALES: indicates % of the net sales that were 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 number of dollars that invoices by person.

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

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

Note: it is recommended to structure a committee that analyzes and reports monthly on the behavior of hidden costs, which result from situations of common occurrence due to lack of concentration and communication such as errors in assemblies, sudden changes in the order of the process, machine damage due to lack of preventive maintenance, poorly taken orders, production schedules not consistent with the possibility of dispatch (portfolio problems, transportation logistics, etc.), use of inappropriate materials, poor quality, in the vast majority of cases, due to carelessness and lack of commitment, work accidents, any other anomalous situation that involves loss of time affecting the level of production, deterioration and inventory losses for any reason.

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