PART 2 - COSTING: THE IMPORTANT PART OF STANDARD COSTS IN THE "MANAGEMENT" AND "PRICING" PROCESSES - INDIRECT COSTS
COSTING: THE IMPORTANT PART OF STANDARD COSTS IN THE “MANAGEMENT” AND “PRICING” PROCESSES
As far as the indirect costs are concerned, they can be used to create several items in the production chain: so, how should we proceed? In order to assign the right cost to each product it is important to identify a coefficient.
For example, the electric energy used for purposes not directly linked to the machinery, costs 100.000 $ per year and the company produces only 3 items. The most common example of a partition coefficient could be the number of units produced. Assuming that the firm produces 15000 units of the product A, 30000 of product B and 40000 of C, the allocation of direct costs will be:
- 100.000€ / (15.000+30.000+40.000)=1.2€
So, 1,2€ of the indirect cost “Energy Indirect” is assigned to each units produced.
Once you establish an attribution methodology for each cost component, you can set the criteria through which you can associate the Cost Component to each product.
In NOW you can make this combination using the Costing Bill of Material, which are defined sets of Cost components where for each one you define the cost/ Unit of Measure Produced or the consumption /Unit of Measure produced. As we can see in the example at pic. 5, the is the following situation, where the allocation methodology of each Cost Component is different:
- Machine labour direct -- 0.0202 hours / machinery per product kg
- Energy direct --0.2645 kw per kg produced
- Amortization --- 0.0454euro per kg produced
- Spare parts -- 0.18% of the cost component assigned to the Amortizations
- Labour indirect-- 1.05% of the cost component assigned to the Amortizations
- Energy indirect -- 0.31% of the cost component assigned to Amortizations
- Infrastructures --- 0.69% of the cost component assigned to Amortizations
The example mentioned above, is not linked to a single product, but it can be shared by several items, whose productive processes are equal and can be compared.
In NOW a similar situation can be easily implemented, because for each Costing Bill of Material codified you can define a different criteria, using gathering methods with different products, on the basis of their codes’ common parts or using some reclassification.
This procedure allows you to reduce to ensure maximum optimization of the coding effort and in so doing, to get some savings in the management and maintenance operations for the period considered in the Cost Calculation.
In NOW the Costs’ Calculation can be static (that is the calculated cost is stored and no more changed until the next calculation) or dynamic (that is the cost is instantly calculated, using the data as they appear now) and it can be carried out in different ways:
- For each Item
- For a list of items
- Making reference to the item on the Client’s Purchase Order, or assembling a set of parameters and combining them in order to simulate a Client’s Purchase Order.
Moreover, using the Costs’ Group you can decide to carry out some “parallel calculations” which are based on Alternative Bill of Materials / Alternative Production Chain / Alternative Cost Components and give a different importance to each one (through the adjustment of an “incidence rate”).
Below you can see a dynamic example of an Item’s Full Cost, that in NOW are used in the so called method of “Cost Analysis”.
This function, in addition to the prompt execution of all the tasks stated above, also allows to drill-down on the details. (pic. 6, here below)
On Picture 7 you can see an example of Raw Material’s Costs for a particular Item, that is a yarn made by mixing up two textile fibre.
On Picture 8 there is the summary of all costs for each Cost Centre (Raw Materials’ Costs are charged to the Cost Centre named “Blending”).
On Picture 9 you can see the summary of all costs based on the Cost Level (the last line shows the Raw Materials’ Costs).
What we detailed above shows a Full Costing situation, on which you can apply a mark up to obtain the final Sales Price.
However, most of the time you can calculate the sales price starting from a Full costing’s lower lever (pic. 10). For instance, you can use a cost which can spin off different components and that can considerably effect the real profit earned by a purchase order and the profit earned by another order, for the same item.
For example we can think about some costs, like logistics ones, client’s special requests concerning quality check and goods packaging, sales agents fees and so on…
In similar situations the sales price is not the result of [(Full cost)+(mark up)], the so called “price list”; but it is based on a new calculation remade every time.
So, with NOW you can use the Pricing function for this purpose.
Commision service providers who quote based on the Customers’ Purchase Orders as it is received to the system generally use this metgod. It is based on some basic choices.
For instance, we created the establishment of a Sales Price, starting from Industrial Costs (see pic. 10).
The Pricing Simulation is based on a list of Pricing Elements, that are combined with a present Cost’s Basis and result as a basic price, to which the company adds a mark-up (in this example the raw materials costs are added to the production costs’ to obtain the “Industrial Costs” (see pic. 10).
It is important to underline that each component of the cost basis can be manually changed, during the simulation.
It is very common to think that you could get a better price for the raw materials from your supplier, much lower than the one set by the Internal Price List. So you want to get a cost basis which is closer to the actual company’s situation.
In Picture 11 we can see an example where:
- The Cost basis is 3.93€
- Some Pricing Elements are added (cost for interests and cost for commission) for 0.53 €.
- Mark up assumed of 10%
- After the first result of 4.91€, we used the Manual Input Price of 5.00€, that gave a new mark up of 12.09%, that is 0.54€ / kg.
By way of conclusion, we can say that it is possible to simulate like this and each company can choose the one which is more suitable to the “sales price target”.
The important thing is to have everything under control and be aware of your future costs and incomes.