Tutorial: Manufacturing Cost Analysis

2y ago
96 Views
12 Downloads
347.64 KB
10 Pages
Last View : 18d ago
Last Download : 2m ago
Upload by : Maxton Kershaw
Transcription

Tutorial: Manufacturing Cost AnalysisAs an engineer, you will be involved in designing and producing products. The company that you willbe working for will want to make as much money as possible from selling a product. Setting the cost ofthe product, deciding how to manage inventory, and pursuing the best investments that will lower themanufacturing costs of the product are examples of decisions that the management of your companywill need to make.Figure 0 shows how the price of a product isdetermined by the costs that are incurred increating the product. As an engineer it will beimportant for you to understand how a Manufacturing Cost Analysis works, because you willbe completing tasks and making design decisions that directly affect the cost of making aproduct, which then affects price and profit. Youwill need to present reports on your work, andproduction costs will almost always need to beaddressed.To understand the costs shown in Figure 0,this tutorial will cover 2 important steps:Step 1: The tutorial first explains vocabularyand concepts related to a Manufacturing CostAnalysis. There will be examples that accompany each concept that will help you understandhow you could apply it to a manufacturing proFigure 0: The price of a product is related to theject.costs of producing the product.Step 2: Next, the tutorial goes through asimple, yet complete example of how to put allof the concepts together to execute a Manufacturing Cost Analysis. This should help you understandhow to assemble a cost analysis for your Pipsqueak Engine Project.1. Manufacturing Cost Analysis BasicsVocabulary and ExplanationsIn this section we cover each concept by first defining the concept, followed by more detailed explanation, and finally illustrating the concept with examples. Each concept is illustrated in a table like Table1.1. The last row of each table contains the sources referenced in creating the table, which are useful forobtaining more information.Table 1.1 CostConcept 1: CostDefinitionThe cash amount (or equivalent) sacrificed to obtain some asset and make it ready foruse.Explanation This definition shows that the cost of something has basically two parts: first, the amountof cash (or cash value of something traded) paid for the item, and second, any extra monManufacturing Costs Analysis Tutorial1 Page

Example 1Example 2Example 3Sourcesey put toward preparing the item for the intended use.A student spends 200 for their ME EN 382 textbook. The cost of the textbook is 200.You trade a bicycle worth 100 plus 50 cash to buy a new laptop. The cost is 100 50 150A real estate investor purchases a piece of land for 200,000 with the intent of developingit. After the purchase the investor spends 90,000 to put in streets, divide it into lots, andadd sewer, water, and electrical connections. The cost for the property is 200,000 90,000 290,000.- html- http://www.accountingcoach.com/terms/C/costCost is a pretty simple concept that you have probably understood since you were in elementaryschool when your mom gave you a quarter to buy a piece of candy. However, to understand manufacturing costs, accountants differentiate types of costs. It is important to know about these costs to execute a Manufacturing Costs Analysis.The first two types of costs that we will discuss are Table 1.2 Fixed Costs and Table 1.3 Variable Costs.The following two tables introduce definitions, explanations, and examples that will help you to understand the concept of Fixed Costs, and then the concept of Variable Costs.Table 1.2 Fixed CostsConcept 2: Fixed CostsDefinitionA cost that does not change due to increased or decreased production of a good or service.Explanation There are some things that companies pay for that do not change when a company produces more of a product or slows manufacturing output. These are called fixed costs.These can include things such as rent, taxes, salaries, insurance, and depreciation.Example 1Shüz, a shoe manufacturing company, increases production by 20% due to higher demand. They still pay 4,000 each month to rent their large industrial facility.Example 2The CEO of Sherman Pharmaceuticals still received his 1,000,000 salary for 2014 eventhough production slowed from March to November.Example 3Industrial liability insurance for an outdoor furniture company, Teak Creations, is 50,000per year. The company decides to ramp up production to take advantage of a new fad infurniture, but the insurance stays the same.Sources- http://www.investopedia.com/terms/f/fixedcost.asp- rs/what-are-examples-of-fixedcosts.htmlTable 1.3 Variable CostsConcept 3: Variable CostsDefinitionA cost that changes due to increased or decreased production of a good or service.Explanation There are certain costs that will either increase or decrease depending on the amount ofproduction. These can include things such as labor, raw materials, waste removal ortreatment, and packaging.Manufacturing Costs Analysis Tutorial2 Page

Example 1Example 2Example 3SourcesShüz doubles production due to higher demand. The bill for the material to make the rubber soles for a certain shoe the company manufactures goes from 4,000 per month to 8,000 per month.Due to low sales, Sherman Pharmaceuticals slows production by 25%, so the companyspends 25% less on buying containers for the medicine they produce.While the cost of insurance stayed the same for Teak Creations, more production meansmore waste wood is produced, so the amount of money the company spends to disposeof the wood increases.- sp- -costDISCLAIMER: In reality, no cost is completely fixed or completely variable. However, accountantsclassify costs as one or the other to make cost analysis models simpler and easier to use. When youcomplete a Manufacturing Cost Analysis you will need to classify the costs involved as either fixed orvariable.2. Manufacturing versus Non-Manufacturing CostsThere are more cost classifications that must be understood to complete a Manufacturing Cost Analysis. First we will discuss the difference between Manufacturing Costs and Non-manufacturing Costs.Tables 2.1 and 2.2 will consider Manufacturing Costs and Non-Manufacturing Costs, respectively.It is important to note that the following classifications are separate from the Fixed or Variable Costsclassification. This means that if you classify something as a Fixed Cost, you cannot assume that it is aManufacturing Cost, or vice-versa.Table 2.1 Manufacturing CostsConcept 4: Manufacturing CostsDefinitionCosts from labor and materials that is directly or indirectly related to producing an item.Explanation When thinking about Manufacturing Costs, we want to identify the costs that are relatedto making a product as opposed to other costs the company might have, such as marketing costs. Manufacturing costs are the costs of taking materials and turning them into theproduct, which can then be placed in inventory. These costs should be clearly linked to thefactory where the product is manufactured.Here are some examples of manufacturing costs:- Property taxes and rent paid for the manufacturing facilities- Maintenance of machines- Depreciation of property and equipment values- Raw material costs- Manufacturing labor costs- Utility costs (electrical, water, sewer) of the production facility- Production waste disposal costsExample 1Manufacturing costs are divided into 3 categories: Direct Labor, Direct Materials, andManufacturing Overhead. These will be explained later.The costs to manufacture shoes include (but are not limited to) the costs of paying theManufacturing Costs Analysis Tutorial3 Page

Example 2Example 3Sourcesfactory workers, janitors, and production managers and the costs of fabric, rubber, glue,and other materials.The accounting register of a small gourmet chocolate company, Swift Chocolates, showsthat it spent 10,000 in Direct Labor, 8,000 in Direct Materials, and 6,000 in Manufacturing Overhead. The total Manufacturing Cost is 24,000.Teak Creations owns a 20,000 square foot industrial facility for producing the furniturethat they sell. Each year they pay 7,000 in property taxes, have a facilities manager thatreceives a 45,000 salary, and spend 200,000 more for janitorial and maintenance. The 252,000 spent every year on these things is included in the Manufacturing Cost of thecompany’s products.- http://www.microbuspub.com/pdfs/chapter4.pdf- ead/explanation- uring-costs.htmlTable 2.2 Non-Manufacturing CostsConcept 5: Non-manufacturing Costs (Non-manufacturing Overhead)DefinitionCosts for company operations that are not directly related to manufacturingExplanation While manufacturing costs are associated with producing items to be put into inventory,non-manufacturing costs are often those related to creating revenue from the inventoryproduced. These costs can be related to other functions of a company as well. Here aresome examples:-Example 1Example 2Example 3SourcesSales and marketing supplies and salariesManagement salaries and office suppliesShipping the completed product to the customer (shipping raw materials to thefactory in order to create the product would be a Manufacturing Cost)Janitorial, maintenance, taxes, and depreciation of non-manufacturing facilitiesResearch and developmentInterest on loansThis means that sales, marketing, research and development, and other related costs arenon-manufacturing costs. Basically, any cost that is not directly related with the manufacturing factory is a non-manufacturing cost. Non-manufacturing costs are also called nonmanufacturing overhead costs.Shüz spends 100,000 on a new marketing campaign in order to increase sales.The expert research and development (R&D) team at Sherman Pharmaceuticals looks todevelop better medicines. The salaries of the researchers, the maintenance of the research facility, and the insurance for the expensive research equipment are all nonmanufacturing costs.Teak Creations spends 2,000 a year on office supplies for management, such as toner,pens, paper, and envelopes.- http://www.microbuspub.com/pdfs/chapter4.pdf- erhead/explanation- uring-costs.html/page/3Manufacturing Costs Analysis Tutorial4 Page

3. Manufacturing Costs BreakdownNow we will look at the three types of Manufacturing Costs: Direct Labor, Direct Materials, and Manufacturing Overhead. We will explain Direct and Indirect costs, which are related to ManufacturingOverhead. Manufacturing Overhead is the total of all Indirect Costs incurred in making a product. Figure3.1 shows how Manufacturing Costs are divided into the different types of costs that will be discussednext.Manufacturing CostsDirect CostsDirect MaterialsManufacturing OverheadDirect LaborIndirect MaterialsIndirect LaborFigure 3.1 This picture shows how Manufacturing Costs are divided into different classifications.The next two tables give definitions, explanations, and examples about Direct Costs and then IndirectCosts. In the Explanation section of each table there are definitions for Direct Materials and Labor andIndirect Materials and Labor.Table 3.1 Direct CostsConcept 6: Direct CostsCosts directly related to the manufacture of an item. These costs should be clearly linkedto the factory where the product is manufactured.Explanation Direct costs can fall into 2 categories:1. Direct Materials: Any material that is a part of the finished product that significantly adds to the weight or volume of the item2. Direct Labor: Any labor done on the product itself that affects the physical properties of the itemIf a cost does not seem to fit into either of these two categories, then it should not beclassified as a Direct Cost.Example 1The soles of a new shoe made by Shüz significantly increase the volume of the shoe, sothe cost of material used to make the soles is a Direct Materials cost.Example 2To make its award-winning gourmet chocolate, Swift Chocolates has one employee thatcuts the chocolate into their signature star shape. The employee’s hourly pay is a DirectLabor cost because the employee is working on a process that directly involves the product.Example 3Teak Creations uses a strong glue to hold the furniture together. The salaries of the employees that glue parts together are added to the total Direct Labor cost, but the cost ofthe glue is not a Direct Materials Cost because it does not add a significant amount ofweight or size (see the next section).DefinitionManufacturing Costs Analysis Tutorial5 Page

Sources- http://www.microbuspub.com/pdfs/chapter4.pdf- abor- http://en.wikipedia.org/wiki/Direct materials costTable 3.2 Indirect CostsConcept 7: Indirect CostsCosts indirectly related to the manufacture of an item. These costs should be clearly linkedto the factory where the product is manufactured.Explanation Indirect costs fall into 3 categories:1. Indirect Materials: Material that does not significantly add weight or volume tothe product, or that is used for something indirectly related to the product. Thiscan be something such as glue, screws, cleaning materials, lubricants, or disposable tools.2. Indirect Labor: Labor important to production that is not performed directly onthe item. This can include materials purchasing, quality control, janitorial labor,and production management.3. Other Indirect Costs: These include costs such as the property taxes on the manufacturing facility or the depreciation of machinery used for production.If a cost does not seem to be a Direct Cost, it should fit into one of the 3 categories above.If you are still not sure, perhaps the cost should be classified as a Non-ManufacturingOverhead Cost.Example 1Two different materials are glued together when a Shüz employee makes soles for shoes.Since the glue does not add significant weight or volume to the shoe, the glue is classifiedas an Indirect Materials cost.Example 2Sherman Pharmaceuticals has a production manager in charge of the employees and machinery in the production line. The manager’s salary is an Indirect Labor cost because heonly organizes and oversees the employees, but does not perform any actions directly onthe product.Example 3Teak Creations builds some shelves in order to store stain needed for a new set of outdoor furniture they are producing. The cost for the materials used to build the shelves isclassified as an Indirect Materials cost and the cost of labor to build the shelves is an Indirect Labor Cost.Sources- http://www.microbuspub.com/pdfs/chapter4.pdf- rs/what-are-indirectmaterials.html- -laborDefinitionFinally, the last concept is Manufacturing Overhead. This concept mostly comes from the ideastaught about in Indirect Costs. As an engineer, it is very important for you to understand ManufacturingOverhead, since it plays a big role in the cost of producing a part, and could influence some of the designdecisions that you will make.Table 3.3 Manufacturing OverheadConcept 8: Manufacturing OverheadManufacturing Costs Analysis Tutorial6 Page

DefinitionManufacturing Overhead is the total of all indirect costs that are required to manufacturea product.Explanation Just add up the indirect costs from the 3 categories: Indirect Materials, Indirect Labor, andOther Indirect Costs.Example 1Shüz spent 10,000 on Indirect Materials, and 12,000 on Indirect Labor, and 11,000 onproperty taxes, so the Manufacturing Overhead Cost was 33,000.Example 2Sherman Pharmaceuticals spent the following in production of one of their medicines during 2014:- Direct Labor: 120,000- Direct Materials: 90,000- Indirect Materials: 50,000- Indirect Labor: 85,000- Machinery Depreciation: 21,000From this information, the Manufacturing Overhead cost was 50,000 85,000 21,000 156,000. (There would be other Indirect Costs, but it is simplified for the sakeof the example.)Example 3A new chef was hired at Swift Chocolates to develop a new line of gluten free chocolates.The new chef does not do any work to create the actual chocolate that is being sold, sohis salary is not a Direct Labor cost. He also does not do any work that indirectly is vital tomaking the chocolate. Because his work is not related closely enough to manufacturingthe chocolate, his salary is counted as a Non-manufacturing Overhead cost, and not aManufacturing Overhead Cost.Sources- http://www.microbuspub.com/pdfs/chapter4.pdf- ead/explanation- rs/what-is-manufacturingoverhead.html4. Costing MethodsNow that you understand definitions and concepts that will help you to classify costs, it is importantfor you to understand two different ways of assigning costs to individual items in a cost analysis. Thesetwo methods are Job Costing and Process Costing. Job Costing is covered in Table 4.1, and Process Costing is covered in table 4.2, which immediately follows.Table 4.1 Job CostingConcept 9: Job CostingDefinitionExplanationA method that calculates the manufacturing costs for a specific job.Job costing is usually done for small batches or single units. Job costing is used inthese types of applications because the price to produce a single unit could varysignificantly. Some examples include:-Designing specific websitesBuilding custom pianosConstructing houses or other buildingsLarge military vehiclesManufacturing Costs Analysis Tutorial7 Page

Example 1Example 2Example 3SourcesA helpful way to know when Job Costing should be used would be to consider if youwould request a quote from a person or company performing the product or service. The biggest factors in deciding to use job costing would be variation in costbetween specific units and the amount of production.Jerry is a contractor who specializes in traditional housing. He uses Job Costing inorder to analyze the cost of each specific house that he builds. He does this becausethe variability of home design and the differences between customers mean thatevery home will have a different cost to manufacture.Star Command, Inc. creates heavily equipped emergency response vehicles formany clients including all branches of the military. The cost of each vehicle variesfrom 100,000 to over 2,000,000 depending on the application and specificationsthe client desires. Star Command uses the Job costing method to add up all themanufacturing costs for each individual vehicle. Extra cost is added to make a profit.Andy owns a company that makes customized wooden canoes. Last month, a clientbought a canoe that cost 2,000 to make for 2,500. This month, a different clientwants a more extravagant canoe that will cost 3,000 in labor and materials. Andyuses Job costing for his business since each canoe is unique and he does not massproduce his canoes in large quantities.- http://www.accountingtools.com/job-costing- der-costingTable 4.2 Process CostingConcept 10: Process CostingDefinitionExplanationExample 1Example 2A method used in mass production that summarizes the total cost of productionover a period of time and assigns that cost to all items produced during that period.Process costing is used mostly for mass production. This is because in mass production there are so many individual products that calculating the exact cost foreach individual one would take too much time and effort. Here are some examples:- Producing Gasoline- Forming water bottles- Making cereal- Sewing clothingImagine trying to calculate the exact cost of each individual plastic water bottle! Itis much easier to calculate the cost of manufacturing water bottles for one monthand then to divide that total cost by the total number of water bottles producedthat month in order to get the cost per bottle.Goody-Goody Cereals produced 50,000 boxes of one cereal last month. The totalManufacturing Cost was 75,000. Using Process Costing, the cost per box of cerealis 75,000 / 50,000 1.50.The manufacturing accountant at SunFence Sunglasses chose to use Process Costing in order to determine the cost per pair of sunglasses since SunFence manufac-Manufacturing Costs Analysis Tutorial8 Page

Example 3Sourcestures over 1,000,000 pairs of sunglasses each year.Apple Delights, a local company that produces various types of apple juice, usesProcess Costing since the batches that they make are so large. In order to determine the cost per gallon, they divide the cost of production for one week by thetotal number of gallons produced in that week.- sting- s-costing5. Review and ExampleNow we apply the following 8 concepts to help you understand and complete a Manufacturing CostAnalysis:1. Cost2. Fixed Costs3. Variable Costs4. Manufacturing Costs5. Non-Manufacturing Costs6. Direct Costs7. Indirect Costs8. Manufacturing OverheadAs a review see if you can define each of these terms and then give an example of each, before reviewing the Comprehensive Example provided below that illustrates the application of these concepts.Comprehensive Example:Table 4.1 is an example of a Manufacturing Cost Analysis. The numbers are made up and may not berepresentative of what actual costs would be, but the concepts used in evaluating the costs are valid.One of the most successful products sold by Teak Creations is a simple outdoor chair. Each chair requires 50 of high-quality wood and 2 of special ultra-strength glue. It takes a CNC machine about anhour to cut out the pieces for one chair. The machine operator is paid 12 per hour. Then it takes anemployee about 1 hour to glue the pieces together correctly. This employee is paid 10 per hour.To take care of the CNC machine, a janitor (paid 10 per hour) spends 30 minutes each day to cleanthe machine and the work area and a repair technician (who works for 30 per hour) spends about 2hours per month checking and repairing the CNC machine. In order to store the buckets of glue and already cut pieces of the chair, some sturdy shelves were built by the janitor in 5 hours of work that cost 400 in materials. The production manager ( 20 per hour) spends about 10% of a 40 hour work week onmanagerial tasks related to the chair. The company makes about 160 chairs per month.The advertising division of the company spends time, money, and effort worth about 600 per monthon the chair. The company also has an accountant and a lawyer. About 400 of each of their salaries canbe related to this one product. About 700 from the salary of company-wide management can be applied to the chair.Table 5.1 Fixed CostsManufacturing Cost Analysis Example: Teak CreationsDirect LaborDescriptionCalculationsManufacturing Costs Analysis TutorialAmount / month9 Page

CNC OperatorFabricatorTOTAL:4040Direct MaterialsTOTAL:Manufacturing Overhead 2 160 𝑐ℎ𝑎𝑎𝑎𝑎 𝑐ℎ𝑎𝑎𝑎𝑚𝑚𝑚𝑚ℎ 105 ℎ𝑜𝑜𝑜𝑜 400ℎ𝑜𝑜𝑜Glue (Indirect Materials)Shelving (Indirect Materials andLabor)Maintenance Technician (Indirect Labor)Production Manager (IndirectLabor)TOTAL:Non-Manufacturing Overheadℎ𝑜𝑜𝑜𝑜 𝑤𝑤𝑤𝑤𝑤 10 4 𝑤𝑤𝑤𝑤𝑚𝑚𝑚𝑚ℎ ℎ𝑜𝑜𝑜 50 160 𝑐ℎ𝑎𝑎𝑎𝑎 𝑐ℎ𝑎𝑎𝑎𝑚𝑚𝑚𝑚ℎWoodJanitor (Indirect Labor)ℎ𝑜𝑜𝑜𝑜 𝑤𝑤𝑤𝑤𝑤 12 4 𝑤𝑤𝑤𝑤𝑚𝑚𝑚𝑚ℎ ℎ𝑜𝑜𝑜2.5 ℎ𝑜𝑜𝑜𝑜 4 𝑤𝑤𝑤𝑤𝑤 10 2 ℎ𝑜𝑜𝑜𝑜 30 𝑚𝑚𝑚𝑚ℎ ℎ𝑜𝑜𝑜4 ℎ𝑜𝑜𝑜𝑜 4 𝑤𝑤𝑤𝑤𝑤 20 ManagementAccountant and LawyerAdvertisingTOTAL 1920 1600 3520 8000 8000 320 450 100 60 320 1250 700 400 400 𝑚𝑚𝑚𝑚ℎ𝑚𝑚𝑚𝑚ℎ 800 600 2100TOTALSGRAND TOTALCost per ChairPrice per chair (50% profit)Price per chair (25% profit) 14870 14870 160 𝑐ℎ𝑎𝑎𝑎𝑎 93.94 93.94 𝑐ℎ𝑎𝑎𝑎 (1.25) 117.43 93.94 𝑐ℎ𝑎𝑎𝑎 (1.5) 140.91Acknowledgements: To Grant Getts and other ME EN 382 personnel who prepared the first version ofthis tutorial.Manufacturing Costs Analysis Tutorial10 P a g e

turing factory is a non-manufacturing cost. Non-manufacturing costs are also called non-manufacturing o verhead costs. Example 1 Shüz spends 100,000 on a new marketing campaign in order to increa

Related Documents:

This tutorial will guide you through the steps to draw a simple map, perform common calculations, and plot charts using the Quick Manufacturing stencil. Quick Manufacturing Tutorial Viewing/printing eVSM Tutorial: This tutorial is designed for two page layout. If printing, you will need double-sided pr

Tutorial Process The AVID tutorial process has been divided into three partsÑ before the tutorial, during the tutorial and after the tutorial. These three parts provide a framework for the 10 steps that need to take place to create effective, rigorous and collaborative tutorials. Read and note the key components of each step of the tutorial .

Tutorial Process The AVID tutorial process has been divided into three partsÑ before the tutorial, during the tutorial and after the tutorial. These three parts provide a framework for the 10 steps that need to take place to create effective, rigorous and collaborative tutorials. Read and note the key components of each step of the tutorial .

Tutorial 1: Basic Concepts 10 Tutorial 1: Basic Concepts The goal of this tutorial is to provide you with a quick but successful experience creating and streaming a presentation using Wirecast. This tutorial requires that you open the tutorial document in Wirecast. To do this, select Create Document for Tutorial from the Help menu in Wirecast.

Tutorial 16: Urban Planning In this tutorial Introduction Urban Planning tools Zoning Masterplanning Download items Tutorial data Tutorial pdf This tutorial describes how CityEngine can be used for typical urban planning tasks. Introduction This tutorial describes how CityEngine can be used to work for typical urban .

Tutorial 1: Basic Concepts 10 Tutorial 1: Basic Concepts The goal of this tutorial is to provide you with a quick but successful experience creating and streaming a presentation using Wirecast. This tutorial requires that you open the tutorial document in Wirecast. To do this, select Create Document for Tutorial from the Help menu in Wirecast.

It is a costing system which treats only the variable manufacturing costs as product costs. The fixed manufacturing overheads are regarded as period cost 5 6 Cost Manufacturing cost Non-manufacturing cost Direct Materials Direct Labour Overheads Finished goods Cost of goods sold Period cost Profit

Energy Modeling software and developing Life-Cycle Cost Analysis. The life-cycle cost includes the system capital cost, energy cost, system maintenance and replacement cost over a 20-year of life span. The life-cycle cost analysis provides the Present Value (PV) of annual cost and the life cycle cost, and it compares the accumulated cash flow .