COST MANAGEMENT

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Learning Objectives:

To grasp a clear understanding of what cost is and how it affects the operation of the company. To gain knowledge on how to manage cost / expenses for better operational results

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Definition of Terms

Cost the amount used for specific purpose

Example: You paid Php6 for a cup of coffee Php6 is the cost of your purchase. The company is paying you Php10,000 per month Php10,000 is the cost incurred by the company for your salary

Operations - refer to activities directly related to producing goods and/or providing services Management - comprises planning, organizing, leading, coordinating, controlling, staffing, and motivating.
In short it is getting things done thru other people
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TYPICAL ORGANIZATIONAL CHART

President

Admin

Operations

Sales & Marketing

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What is operations management?

Management of systems or processes that create goods and services.

Man Materials Machine Process Goods / Services

Control

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Where are you here?

Man Materials Machine

Process

Goods / Services

Control

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Why cost management training for you:

As a leader, you have a first hand information of what is going on in the line. You have direct hand on the performance of your line. You are the one to implement / execute actions to improve your line.

So it is very important for you to have knowledge on cost management

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What is cost management?

identifies, collects, measures, classifies, and reports information that is useful to managers in costing (determining what something costs), planning, controlling, and decision making

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Cost Management Processes

Resource Planning

Cost Estimating

Budgeting

Basically the cost computed here + minimum allowance for mark-up = selling price

Cost Control

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RESOURCE PLANNING

What are the equipments needed What are the required raw materials and supplies What is the capacity of the line How many manpower is needed

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COST ESTIMATING

How much is the cost of raw materials? How much is the labor cost? How much is the depreciation of the equipments needed, how many is the estimated production volume? How long will it takes to produce one unit

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COST CONTROL

It is the final step of the cost management process. It is a major element of project / business success It consists of efforts to track spending and ensure it stays within the limits of the cost baseline.

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WHY CONTROL COST?

If you own a sari-sari store, will you sell goods at a price lower than your purchase price? What will happen if you sell it at a lower price? Your business will go bankrupt and eventually will close
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Helpful illustrations:

Processes needed to produce cover

Blanking Auto press Press QC

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Cost to produce 1 unit

Raw Materials

SAIE80 QN 0.4X335XCOIL SAIE80 QN 0.8X335XCOIL 3 processes x 25pesos TOTAL

Php 20.00 30.00 75.00 Php125.00

Labor Cost

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Income 1 unit

Selling Price Less: Cost of 1 unit Gross income

Php 150.00 125.00 Php 25.00

Is this good or bad?

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What happens if there were repaired units?

Quantity Produced = 100 Quantity Repaired at QC = 25 # of processes including repair = 4 Cost of Production = 100 x 150 = 15,000 Sales = 100 x 150 = Less: Cost Gain / (Loss) 15,000 15,000 0
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What happens if there were rejections?

Quantity Produced = 100 Cost of Production = 100 x 125 = 12,500 Quantity Rejected = 25 Sales = (100 25) x 150 = 11,250 Less: Cost 12,500 Loss on sale 1,250
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Repairs and rejections are not the only reason why income is going down. Others includes:

Overtime instead of finishing within the regular time. This may also be due to wrong planning, no materials, abrupt change of orders, etc. Additional processes not included in the original assumption. In the case of mufflers and the likes, stripping.
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Example: (1 unit)
Muffler: Cost: Selling Price 1,200 Raw Materials 850 Plating Chemicals 100 Labor 6 processes (@25) 150 Stripping Chemicals 50

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Lets compute for the income on sales given the following assumptions:
1. 2. 3.

4.

Quantity produced Stripped parts (repaired) Repeated processes Painting & Plating Rejected (cannot be repaired)

250 pcs 25 pcs 2 processes 5 pcs

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Computation:
Sales (245 pcs x 1,200) Cost of sales: Raw Materials (250 x 850) Indirect Materials (250 x 100) Labor Cost (250 x 150) Repair Cost: Labor 25 x 3 x 25 1,275 Plating Chemicals 2,500 Stripping Chemicals 1,250 Gross Income per part 294,000 212,500 25,000 37,500

5,025

280,025 13,975
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Now you know the implications of rejects, repairs and other non-value adding cost..
What will you do?........ What can you do?

ELIMINATE NON-VALUE ADDING COST.. CONTINUOUS IMPROVEMENT

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Examples of non-value adding cost

Lead time or cycle time:
Cycle time = process time + inspection time

True?.......
Cycle time = process time + inspection time + move time + waiting time + repair time +
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SOLUTIONS:

Reduce quality problems Reduce downtime Line balancing

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ANY QUESTION?

I HAVE MANY QUESTIONS.

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QUESTION:
_________ is getting things done thru others. 2. _________ is the amount used for specific purpose. 3. _________ = process time + inspection time 4 6 Inputs of the process 7. _________ the management of processes that creates goods and services.
1.
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8 11: The 4 processes of cost management 12 14: Give example of non-value adding cost 15. __________ refers to activities directly related to production of goods or providing services.

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Given the following data, compute for the repair cost and income / (loss)

Selling Price P200 each Raw Materials (60% of selling price) Labor cost P20 per process Processes (blanking, stamping, inspection) Quantity produce 500 Quantity repaired 20 Irreparable units 10 Repeated process from 2nd process
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Given data:
Selling Price P200 each Raw Materials (60% of selling price) Labor cost P20 per process Overhead P5 per unit Processes (blanking, stamping, inspection) Quantity produce 500 Quantity repaired 20 Irreparable units 10 Repeated process from 2nd process Compute for: 1. repair cost 2. income/(loss) on sale

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Computation:
Sales (490 pcs x 200) Cost of sales: Raw Materials ( 60% x 200 x 500) Labor Cost (20 x 3 x 500) Overhead Cost (5 x 500) Repair Cost: (20 pcs x 2 processes x 20) Gross Income 98,000 60,000 30,000 2,500

800

93,300 4,700

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Anu-ano ang mga problema sa linya ninyo (non-value adding activities) at ano ang pwede ninyong gawin para ma-improve and performance ng linya ninyo?

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