Presented by Bill Brown June 9th, 2009

Product costing is the process of tracking and studying all the various expenses that are accrued in the production and sale of a product.
Cost Accounting is a part of managerial accounting which establishes budgets, cost of operations, and used to calculate profitability. Cost accounting can be viewed as translating the Supply Chain (Production Process) into financial values.

There are five major categories used in producing a product:

1. Raw Materials (Direct & Indirect). 2. Labor (Indirect & Direct). 3. Allocations (Overhead, Commissions & Margins). 4. Equipment (how to depreciate). 5. Freight (in and/or out).

Todays Example:
Scope of the job: Customer will provide: Customer would like us to Pads, master cartons, bill bid out the service of of assembly, samples, and collating 12 pads (69), direct shipment of all shrink wrapping the pack components to our of 12, box up 6 inner location. packs into a master carton, We will provide: Labor, label & seal the master supervision, shrink film, carton, and palletize 40 box labels, box tape, master cartons per pallet stretch wrap, pallet labels, (5 rows of 8). The Unit of pallets, and return all Measure (UoM) will be FGs & residual the master carton (6 packs components to customer. of 12).

Examples of Raw Materials:

Direct MaterialsIndirect MaterialsComponents that become Are used to package or identify the product that a functional part of the you are producing. product being sold. Examples:

Example:

Pad

Shrink Film Master Carton Box Tape Labels Pallets Pallet Stretch Film

Sub-Contracting Cost Sheet- Commodities

Date: 10/23/08 Prepared by: Bill Brown Company: ABC Collate 12 pads per pack- shrink Pack 6 "12 packs" per master Label & palletize (8 to a layer x 5 high) # Per case 6 1 1 1/40 1/40 R.M. Subtotal = Scrap Total R.M. Cost = II.) Labor Indirect Direct Misc. $7.15 x 250 sec 3 hours/ $7.55 PW/ Cost/case $0.3467 $0.0250 $0.0500 $0.0213 $0.0009 $0.4439 $0.0133 $0.4572 $0.0306 $0.5243 $0.0000 $0.5549

Key:
BLUE CELLS: Enter data. YELLOW CELLS: Performing calculations. GREEN CELLS: Subtotaling data. GRAY CELL: Total estimated cost.

I.) Raw Materials Item Shrink film (per pack) Tape per Master Carton Master carton label Stretch Wrap per pallet Pallet Labels

Cost Each $0.0578 $0.0250 $0.0500 $0.8500 $0.0350

3%

700 = 14.4 std=

Total labor Cost= III.) Allocations Overhead Commission Margin

50% 3% 10% Total Allocations =

$0.2775 $0.0166 $0.0555 $0.3496 $1.1250 $1.1250 $0.0000 $0.1000 $0.1000 $2.5867

IV.) Equipment Depreciation Expense Total Equipment Cost = V.) Freight In Out $1.00 X $1.00 X 0 miles/ 700 = 50 miles/ 500 = Total Freight Cost = Total Delivered Cost =

I) Raw Materials (UoM)

Item Cost Each #/case Shrink Film $.0578 6 Box Tape $.0250 1 Box Label $.0500 1 Stretch Wrap $.8500 1/40 Pallet Label $.0350 1/40 Cost/Case $.3467 $.0250 $.0500 $.0213 $.0009

R.M. Subtotal= $.4439

I) Raw Materials (Continued)

Subtotal R.M.= $.4439

Scrap: materials that are wasted, rejected, or used as samples. Another words, what is the value of raw materials that will not be saleable.

Scrap

3%

$.0133

Total R.M. Cost=

$.4572

Labor:
Direct Labor (DL)Value-added-labor (VAL) that enhances your product and is dependant on the level of production. Indirect Labor (IL)Is not directly related to the production of your product, but is required to support your overall operations. Sometimes IL does not change with the levels of production.

II) Labor (UoM)

Indirect ($21.45/700) = $.0306

Estimated one hour to unload materials from our truck, one hour to load/unload the shop floor, and one hour to load our truck. Three hours x $7.15/hour for M.H.= $21.45 divided by the units per truckload (materials to complete 700 master cartons per truckload).

Direct Labor (UoM):

Erect & label Master Carton
15 seconds x 1 per master carton= 20 seconds x 6 per master carton= 15 seconds x 6 per master carton= 5 seconds x 6 per master carton= 15 seconds 120 seconds 75 seconds 30 seconds

Collate 69 12 pads per inner pack L bar seal inner pack of 12 pads Inspect and pack inner packs into master Seal & Stack master carton
10 seconds x 1 per master carton= 10 seconds Total time per master carton= 250 seconds

II) Labor (continued)

Direct (250 seconds @ PW of $7.55)= $.5243
Calculation: 3,600 seconds/hour divided by 250 seconds/master carton = 14.4 master cartons/hour. Divide your prevailing wage by your production standard, $7.55/14.4= $.5243 per master carton (Unit of Measure= UoM).

Total Labor Cost (DL& IL) = $.5549

Allocations: Allocations:
Overhead- building maintenance, utilities, fringe benefits- another words anything not funded (*). Commission- You need to reward your sales force!!! This makes your commission payments fully funded by your customer. Margin- I know, we do it for the mission...but a few extra pennys never hurts.

III) Allocations: Percentage add-on

to your total labor cost.
Type Overhead (*) Commission Margin Percentage 50% 3% 10% Add-on $.2775 $.0166 $.0555

Total Allocations=

$.3496

Equipment:
DepreciationIs an accounting term meaning to spread the cost of a tangible asset over the useful life of that equipment. Methods: Straight Line Depreciation. Declining-Balance Method. Sum-of-Years Digits.

StraightStraight-Line Depreciation:
Annual Depreciation= Cost of fixed asset-scrap value Life span (years) = $25,000-$2,500 10 years Annual Depreciation= $2,250 Estimate that you will produce 144,000 units year: In our example there were 72 units per master carton. Therefore, we will produce 2,000 master cartons/year (144,000 divided by 72= 2,000). Annual Depreciation $2,250/2,000= allocation of $1.1250 per master carton (UoM).

IV) Equipment (UoM)

Depreciation Expenses = $1.1250

Freight:
Inbound- The cost of picking up raw materials, packaging components, labels, samples, equipment, ETC. Outbound- The cost of returning FGs to your customer or direct shipping them to their end-users. Also, returning or disposing of any leftover components. You could be using your own truck, common carrier, and/or UPS/RPS.

V) Freight (UoM)
In (Customer to direct ship) = $.0000 Out = $.1000 Calculation: $1/mile (lease rate, fuel, & drivers wage) x 50 miles (round trip) divided by units (500 master cartons per truckload).

Total freight cost=

$.1000

What do we quote?
Price: We determined that our estimated delivered cost would be $2.5867. I would quote $2.60/master. What is your pricing philosophy?
Lets negotiate Bottom line best price Because your such a good customer

Production Capacity: For this product our limiter (The Goal) would be our L-bar sealer. 3,600 seconds per hour/15 seconds per pack= 240 packs/hour. We estimate that our consumers perform at 50%, therefore 120 packs hour x 5 hours/day= 600 packs day. There are six pack per master carton, so our production capacity would be 100 master cartons/day (UoM).

To: Date:

Customer ABC 06/09/09

Attention: Submitted by:

QUOTATION: Packaging Writing Tablets

Mr. Goodnews Bill Brown

This quotation is for providing the service of packaging twelve shrink-wrapped writing tablets per inner pack and boxing six inner packs per master carton per customers specification. Master cartons will be sealed with 3 clear tape, labeled, and palletized. Pallet configuration will be eight master cartons per layer and tiered five high. Each pallet will be labeled with a pallet tag and stretch-wrapped. Estimated annual quantities will be 144,000 writing tablets per year (2,000 cartons). ABC (customer) will provide the following: 8 12 x 11 writing tablets bulk stacked on pallets, master cartons, bill of assembly, and approved sample. The customer will be responsible for coordinating and providing freight for the above materials to The Arc Otsego. The Arc Otsego will provide the following: All labor and supervision required performing the service as described above. Shrink-wrap film, carton tape, carton labels, stretch-wrap, pallets, pallet tags, and returning finished goods & leftover components to the customer location in Sidney, NY. Quotation: Packaging writing tablets: $2.60/master carton (6 inner packs of 12 writing pads). Production capacity: 100 master cartons/day. Price effective: 10/23/08 to 10/22/09

Thank you for considering The Arc Otsego and keeping New Yorkers working. working www.arcotsego.org

Activity Based Costing (ABC)

If a manufacture wants to know the true cost of producing a particular product for a specific customer, the traditional cost accounting method is inadequate. This accounting method arbitrarily assigns an across the board percentage add-on of expenses onto direct costs. ABC on the other hand identifies all activities associated with your products & customers and assigns them a cost.

Contact Information:

www.rehabmarketing.org

Bill Brown, Director of Business Development & Operations (607) 433-8447 ext. 112 (Stillno cell phone!!!) brownb@arcotsego.org

 Lets hear from you all regarding your:

Costing philosophies. Negotiating tactics.

Time Study form- Handout #3 Thank you for attending our ARM conference and this session.

The
Time t

c Otse

ct

Key:
m
ate 6 8 2009

a sis

Special Notes:

Person being

Units complete : Elapse time:

Approved by:

o Bro n

Effective Date:

6 8 2009

77

Production/hour:

51 1834

DO Production:

100% Time:

70 33524

PFD allowances:

20 00% DO standard time: 70.3353 Sec. 51 /Hour

verage time unit:

58 6127

DO rounded-up time:

58.6127 Sec.

Time per unit:

60 57143 Seconds

41 60000 Seconds

73 66667 Seconds

(( 5 %

 

St

ie :

Bob

h 21 21 2 Minutes

Be

Blue 30 20 8 Minutes

r ng For er 18 22 1 Minutes

(2

'1 0

)( (

('& %

!

Desc iption:

Collate 12 pa s front to back("69")

ie

Bill Sc tt

$$

 #

!



m a

12-225-09

BLUE CELLS: Enter data. YELLOW CELLS: Performing calculations. GREEN CELLS: Subtotaling data.

 

 

!   "