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Understanding and Using Cost Breakdowns
Professional courses to optimize your buying team’s performance
1
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All
APD Personnel
Main Presenter –
Jeoff Burris
Producer
Jon Homrich
Breakdowns Professional courses to optimize your buying teams - - PowerPoint PPT Presentation
Breakdowns Professional courses to optimize your buying teams - - PowerPoint PPT Presentation
Understanding and Using Cost Breakdowns Professional courses to optimize your buying teams performance 1 Introductions All APD Personnel Main Presenter Jeoff Burris Producer Jon Homrich 2 Making Purchasing a
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Executive Alignment Purchasing strategies advance the CEO’s vision for the company. Collaboration Purchasing works with other departments and suppliers to achieve common benefits. Influence Purchasing is engaged on 100% of third party spend across both COGS and SG&A. Strategic Focus Strategic resources focus on strategic activities 100% of the time. People Management Domain experts are provided the tools, training and structures needed to be successful. Access to Actionable Data Spend decisions are made using real-time cost and market intelligence.
Making Purchasing a Competitive Advantage
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We lever a network of >10,000 supply chain professionals, and have both onshore and
- ffshore delivery capabilities
Our solutions are empowered by a purpose built, proprietary technology platform We have a database of >1,000 cost elements based of >850 cost blueprints.
All of our solutions are provided on a modular, as-a-service, basis.
People Tools & Technology Intelligence
Elevating the Role of Purchasing
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Companies can have as much as 70% costs based upon supplier pricing. So, your effectiveness in managing this pricing is paramount to your company’s financial success. Importance
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Session 1 – July 11 - Raw Material and Labor Increase understanding of the cost detail suppliers provide in their quotations. Review common ways suppliers inaccurately quote. Session 2 – July 18 Burden and SG&A Increase understanding of the cost detail suppliers provide in their quotations. Review common ways suppliers inaccurately quote. Review top ways to: Improve analysis of the cost impacts of design changes. use the cost breakdown information to negotiate costs of design changes.
Objectives for this Training
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Poll Question
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Yearly Volume (11) Currency (12) Exchange Rate per USD USD 1.0000 EURO TBD- Max. daily production (18)
Raw Materials
Item description (19) Scrap Value/Part (29) % $ / € /TBD Raw Material SG&A and Profit Markup (32) % $ / € / TBD Delivery flexib. (81) 2,083 Weekly 10,500 Detail Stamping 25777427 - 1008 CRS in Coils Detail Stamping 25777427 - 1008 CRS in Coils Detail Stamping 25777425 - 1008 CRS in Coils Detail Stamping 25777426 - 1008 CRS in Coils Detail Stamping 25796964 - 1008 CRS in Coils Detail Stamping 25777428 - 1008 CRS in Coils Tie Bar Assembly 2,500,000 5000 500,000 GM GMT 900 15What percent of the time are you asking suppliers to complete the Inteva Detailed Cost Breakdown?
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Poll Results
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Buyer strives to control market forces that determine pricing. Buyer strives to understand and help manage the cost drivers of the purchase.
Market Based Pricing Cost Based Pricing
Management of Pricing
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Profit Price Profit
Establishment of Pricing
Buyer Focus Costs Price Costs
Market Based Pricing Cost Based Pricing
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Management of Pricing
Positives
Straightforward Supplier Participation
Swift Results
Simple Analysis
Usable for most commodities
Negatives
Limited understanding of cost drivers
Struggle to understand pricing validity
Inconsistent supplier pricing
Difficult to control price over time
Market Based Pricing Cost Based Pricing
What are the Positives and Negatives of getting detailed cost breakdowns from suppliers?
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Let’s Use the Chat Feature to Share
What are the Positives
and Negatives of getting detailed cost breakdowns from suppliers?
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Management of Pricing
Positives
Straightforward Supplier Participation
Swift Results
Simple Analysis
Usable for most commodities
Negatives
Limited understanding of cost drivers
Struggle to understand pricing validity
Inconsistent supplier pricing
Difficult to control price over time
Positives
Detailed understanding of cost drivers
Ability to validate quote
Establish methodology for pricing adjustments
Standardize cost
Basis for collaborative relationships and tools
Negatives
Involved Supplier Participation
Usable for select commodities
More time spent in preparing and analysis
Market Based Pricing Cost Based Pricing
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Management of Pricing
What determines whether a buyer uses a Market or Cost Based approach?
Interest Ability
Market Based Pricing Cost Based Pricing
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Buyer Interests
Supplier controls the design; buyer has no input. Product has limited impact to buyer’s profit. Manufacturing costs of the product are insignificant. Buyer controls the design of the product and therefore can influence costs. Product pricing has a significant impact to buyer’s profit. Manufacturing costs of the product are significant. Market Based Pricing Cost Based Pricing
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Buyer Ability
Suppliers hold the balance of power. Few suppliers controlling the market. Buyer has only market based tools, knowledge or resources. New evolving product. Buyer holds the balance of power. Many suppliers. Buyer has cost based tools, knowledge and resources. Mature product. Market Based Pricing Cost Based Pricing
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Global Sourcing - Market vs Cost Approach
90 95 100 105 110 115 120 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Market
Initial Sourcing with competitive pressure – no cost knowledge
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97 98 99 100 101 102 103 104 105 106 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Market
Without cost knowledge, price creep occurs
Global Sourcing - Market vs Cost Approach
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97 98 99 100 101 102 103 104 105 106 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Market
Market testing/negotiations used to reduce price
Global Sourcing - Market vs Cost Approach
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Global Sourcing - Market vs Cost Approach
97 98 99 100 101 102 103 104 105 106 107 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Market
Cycle repeats Resourcing at the peaks captures market pricing
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Global Sourcing - Market vs Cost Approach
92 94 96 98 100 102 104 106 108 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Market Cost
However, the market testing fails to capture the true cost.
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The Case for Cost Breakdowns
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The Case for Cost Breakdowns
Effective use of cost breakdowns is the best cornerstone for effective cost management as it: Provides buyers and managers with actionable data to improve purchased material cost. Provides information required to understand global sourcing opportunities. Improves negotiation results regardless of the negotiating model. Can form the basis for more collaborative supplier relationships based upon cost models and tools to reduce waste and cost.
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Benefits to Buyers
Data driven approach, used consistently makes issue resolution easier. Can change the tenor of negotiations from positional (win/lose) to less stressful, more collaborative, partnership based. Increases buyers knowledge of operations as well as cost accounting thus providing more ability for lateral and promotional organization moves.
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Benefits to Suppliers
More objective and equitable quoting process. Provide supplier feedback on cost competitiveness. Ensures pricing is tied to cost. Common understanding of cost structure provides supplier and customer with the basis for a collaborative relationship.
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Commodities that can use Breakdowns
Characteristics - -
High manufacturing cost as a % of sales Customers controls the design Many suppliers
Examples –
Construction Capital equipment Plastic parts Stampings Assemblies
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Cost Breakdowns
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Approach
- 1. General accounting refresher to better understand
what information is contained in a cost breakdown.
- 2. Analyze each of the 5 areas of cost in detail through
discussions and workshop examples.
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5 Main Areas of Cost
Labor Material Burden SG&A Profit
Selling, General, and Administrative
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Cost of Goods Sold
Cost of Goods Sold
Profit Revenue Material Cost Direct Labor Cost Burden/ Overhead SG&A
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Material Cost
Labor
Material
Burden SG&A Profit
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Material Cost Simplified
Material Cost per Unit of Measure Amount
- f
Material Used
Material Cost
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However, It’s not that Simple Material specifications may be left to interpretation. Manufacturing processes are not 100% efficient in using raw materials. Suppliers mark up material cost to cover cost
- f procurement and storage.
Purchased materials are scrapped.
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Raw Materials - Purchased Parts
Raw Materials / Fabrication Purchased Parts/Services
Transformed in Manufacturing Process Assembled in Manufacturing Process Services provided by an
- utside company
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Raw Material Cost Calculations
1 lb of Raw Material Costing $2/lb Goes Into the Process
Raw Mat. Units * cost Per unit 1 lb * $2 per Lb = $2 1 Part is Produced $2 / 1 Part = $2 per part
Raw Mat Cost/Part * (1+Scrap %) = Total Raw Mat Cost/Part $2.00 per part * 1.01 = $2.02
1 Finished Part Weighs .9 lbs 1% of Finished Parts are Scrapped in Process
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Raw Material Cost Calculations
1 lb of Raw Material Costing $2/lb Goes Into the Process
What about the scrap? .1lb of engineered or fabrication scrap
- ccurs in production
.009 lb of scrap occurs after production 1% * .9 lb = .009 lb
1 Finished Part Weighs .9 lbs 1% of Finished Parts are Scrapped in Process
Total scrap produced .109 lb
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Raw Material Cost Calculations
1 lb of Raw Material Costing $2/lb Goes Into the Process
The supplier sells the .109 lb of engineered scrap for $.50 / lbs $2.02 - $.0545 = $1.9655
1 Finished Part Weighs .9 lbs 1% of Finished Parts are Scrapped in Process
This Scrap Resale reduces the material cost .109 lb * $.50/lbs = $.0545 The process produces .1 lbs of engineered scrap and .09 lbs
- f finished part scrap.
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Example - Raw Material Cost Calculations
1 lb of Raw Material Costing $3/lb Goes Into the Process 1 Finished Part Weighs .8 lbs 1% of Finished Parts are Scrapped in Process
What is the cost of raw material the supplier must purchase to produce 1 good part? Raw Mat Cost/Part * (1+Scrap %) = Total Raw Mat Cost/Part $_____ per part * (1 + ___) = _______
3.00 .01 3.03
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ExampleRaw Material Cost Calculations
1 lb of Raw Material Costing $3/lb Goes Into the Process 1 Finished Part Weighs .8 lbs 1% of Finished Parts are Scrapped in Process
What about the scrap? ____lbs of Engineered or fabrication scrap occurs in production _____lbs of Process scrap occurs after production Total scrap produced _______ lbs 0.2 0.008 0.208 1% * .8 lb = .008 lbs
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Raw Material Cost Calculations
1 lb of Raw Material Costing $3/lb Goes Into the Process
The supplier sells the ______lb of scrap for $.75 / lbs
1 Finished Part Weighs .8 lbs 1% of Finished Parts are Scrapped in Process
____ lbs * $.75/lb = $_____ 0.208 0.208 0.156 Total Raw Material Cost: $______ - $______ = $____ 3.03 2.874 0.156
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Material Breakdown – Best Practices The breakdown has suppliers identify:
Material Type Material Purchase Cost Gross, Net Weights Process Scrap Benefits from Resale/Reuse of Scrap Country/Region of Origin
The Inteva breakdown has all of these!!!!
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How Suppliers Incorrectly Quote
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Incorrect/Inaccurate Quoted Weights
Effective counter measures:
Physically weigh parts yourself and compare against quoted weight. Compare quoted weight to CAD data weight. ________________________________ ________________________________ ________________________________
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Conflicting Material Types
US vs. Asia vs. Europe material standards Effective countermeasures:
Direct suppliers on which materials to use in quote with detailed specifications. Get engineering buy into equivalents prior to market test. ________________________________ ________________________________ ________________________________
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Material Type not Defined
Effective counter measures:
On existing part quotes, use the current supplier material. Obtain engineering buy in into possible material options. On a new part have engineering specify or have supply base make recommendations. Conduct an RFI prior to the RFQ. ________________________________ ________________________________
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Supplier Overstating Scrap Rates
Effective counter measures:
Audit supplier operations data to support quoted rates. – Quiet ops review audit. Benchmark scrap % from other quotes and compare to see if supplier is inline with competition Reviewing PPAP data ________________________________ ________________________________ ________________________________
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Inconsistent Supplier Scrap Rates
Effective counter measures:
Compare supplier previously quoted rates with current quoted rate. Check other suppliers across the same parts. Compare blank sizes. ________________________________ ________________________________ ________________________________
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Incorrect Scrap Resale Rates
Effective counter measures:
Question supplier about their scrap? Do they resell it? What is the value of their
- scrap. If there is value, supplier should
quantify and credit customer. Audit material scrap invoices for accurate scrap credit Review against published indexes ALWAYS review with economic adjustments ________________________________ ________________________________
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Different Effective Dates
Effective counter measures:
Question supplier about the dates especially
- n new programs.
Specify effective dates in RFQ. ________________________________ ________________________________
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Incorrect/Inaccurate Quoting
Including hidden rebates or productivity
Effective counter measures:
Audit supplier component pricing through checking paid invoices of parts. Audit of supplier payments. Compare across suppliers. Obtain quote from supplier directly. ________________________________ ________________________________ ________________________________
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Incorrect Part or # of Parts Effective counter measure
Check components parts against drawings to ensure the components are of spec. Suggest or direct specific second tier suppliers. ________________________________ ________________________________ ________________________________
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Uncompetitive Pricing
Effective counter measures:
Compare supplier component pricing to see where certain suppliers are uncompetitive. Suggest or direct specific second tier suppliers. Assist supplier with their purchasing practices. Ask for tier 2 cost breakdowns. ________________________________ ________________________________ ________________________________
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Potential issue: ________________ Effective counter measures:
________________________________ ________________________________ ________________________________
Other Potential Issues
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Raw Materials Check List
Area Items Check R a w M a t e r i a l Type Material specifications are clear and consistent Quoted Cost Consistent between suppliers Quoted Cost Consistent with historical trends Quoted Cost Consistent with published indices Usage Gross part weights are consistent between suppliers Usage Gross part weight has been verified by weighing Usage Net part weights are consistent between suppliers Usage Net part has been weighed Usage Weights have been verified to CAD Calculations Scrap Consistent scrap % between suppliers Scrap Scrap % is consistent with historical quotes Scrap Scrap % has been validated with process and record audit Scrap Supplier is providing "credit" for scrap resale Scrap Consistent Scrap Resale rates between suppliers Scrap Scrap Resale rates consistent with historical trends Scrap Scrap resale rates consistent with published indices
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Purchased Part Checklist
Area Items Check
P u r c h a s e d P a r t s & S e r v i c e s Parts Purchased parts and services are in line with design Usage Number of purchased parts are consistent between suppliers Sub-Suppliers Suppliers of purchased components are acceptable Scrap Consistent scrap % between suppliers Scrap Scrap % is consistent with historical quotes Scrap Scrap % has been validated with process and record audit
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Labor
Labor Material Burden SG&A Profit
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Labor & Burden Costs
Usually categorized together because their costs are generally based on a cost per hour.
Labor Costs - costs associated with the amount of direct labor involved in the manufacturing a product. Burden Costs - costs associated with the overhead and indirect labor costs involved in the manufacturing of a product.
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Labor Cost Simplified
Labor Cost per Unit of Time Labor Time Required for Production Labor Cost
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However, It’s not that Simple Pure (Gross) vs. Actual (Net) Cycle time Direct vs. Indirect Operators Direct Labor Rate vs. Fully Fringed Rate Process scrap needs to be accounted for in Labor cost
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Labor Cost Calculations
Process can produce 60 gross parts in an hour
Gross Parts Per Hour * (Efficiency Rate) = Net Parts per Hour 60 * 0.80 = 48
Efficiency Rate is 80% Downtime occurs for machine breakdown, product changeovers, etc. If downtime is planned at 20%, the 20% is referred to as the process inefficiency rate.
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Labor Cost Calculations
Operator pay is $10 per hour
Direct Labor Rate + Fringe Rate = Fully Fringed Labor Rate $10 + $5 = $15
Operator benefits cost the company $5 per hour
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Labor Cost Calculations
48 net parts per hour
# of operators * (FF-labor rate) / Net Parts per hour = labor cost 2 * $15/hr / 48 = $0.625/part
2 Operators Fully Fringed Labor Rate is $15/hr
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Standard Hours Process time in hours required to produce 1 part 1 hour divided by Net Parts Per Hour = Standard Hours 48 Net Parts per Hour would result in: 1 hour/48 net parts/hour = 1/48 = .020833
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Example - Labor Cost Calculations
Process has a Gross Pieces per hour of 700 with 85% Efficiency Rate 2 Operators $14 per hour. Operator benefits cost the company $3 per hour
(# of Ops * Fully Fringe Rate) / (Net Pieces/Hr) = labor cost per part ( _____ * ______ ) / (______) = __________
*Gross pcs Hr * Efficiency Rate = Net Pieces Per Hour
________ * ____ = ______
$.05714 .85 595 2 $17.00 595 700
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Standard Hours for Our Example
1 hour divided by Net Parts Per Hours = Standard Hours 1 hour / 595 net parts/hour = 1/595 = .00168 Standard Hours * $34 = $.5712
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Direct vs. Indirect Direct labor is applied to the actual production of the part. Examples:
Stamping press operator Lead person – if tied to process Carpenter
Indirect labor is not applied to the production of the part. Examples:
Machine repair Janitor
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Labor Breakdown – Best Practices
Separates Direct Labor rates from fringe rates Captures Indirect Labor separately from direct labor usually in Burden/Overhead Captures gross and net production rates Clearly captures process inefficiency Utilizes rates in calculations that lead to final prices
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Overstatement of Inefficiencies Effective counter measure:
Have supplier breakdown their
- inefficiencies. Look for items that stand
- ut from array of quotations received.
Compare to other suppliers. Compare to historical quotes. ________________________________ ________________________________ ________________________________
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Overstated # of Direct Employees
Effective countermeasures:
Perform audit of supplier operations 6
months to a year after initial launch of product and compare to quote.
Compare previous quotes to current
quote.
Compare to similar product quotes. Compare to PPAP/Control Plan/PFMEA. ________________________________ ________________________________ ________________________________
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Including Indirect in Direct Effective counter measures:
Perform audit of supplier operations to
determine which employees are direct and indirect.
Understand where indirect employee
costs are allocated, typically accounted in overhead.
________________________________ ________________________________
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Uncompetitive Wage Rates
Effective counter measures:
Comparative data, other supplier data,
industry standard, online government data.
Audit supplier operations labor rate data
to support quoted rates.
If applicable, audit supplier union
contracts.
________________________________ ________________________________ ________________________________
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Labor Checklist
L a b
- r
Operator Wage Rates Consistent with previous quotes Operator Wage Rates Consistent with industry norms Operator Wage Rates Consistent with regional norms Operator Wage Rates Fringe rates are in the normal range of 25- 35% of labor rate Production Rates Consistent with previous quotes Production Rates Consistent with competitors Production Rates Consistent with PPAP Production Rates Verified by Audit Inefficiency Rates Consistent with previous quotes Inefficiency Rates Consistent with competitors Inefficiency Rates Consistent with PPAP Inefficiency Rates Verified by Audit
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Session 2
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Session 1 – July 11 - Raw Material and Labor Increase understanding of the cost detail suppliers provide in their quotations. Review common ways suppliers inaccurately quote. Session 2 – July 18 Burden and SG&A Increase understanding of the cost detail suppliers provide in their quotations. Review common ways suppliers inaccurately quote. Review top ways to: Improve analysis of the cost impacts of design changes. use the cost breakdown information to negotiate costs of design changes.
Objectives for this Training
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5 Main Areas of Cost
Labor Material Burden SG&A Profit
Selling, General, and Administrative
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Example - Raw Material Cost Calculations
2 lbs of Raw Material Costing $2/lb Goes Into the Process 1 Finished Part Weighs .8 lbs 2% of Finished Parts are Scrapped in Process
How many parts must the supplier plan to produce if the supplier needs 100 good finished parts? Raw Mat Cost/Part * (1+Scrap %) = Total Raw Mat Cost/Part $_____ per part * (1 + ___) = _______
2.00 .02 2.04
# of finished parts required * 1 + Scrap % 100 * (1 + .02) = 102 What is the cost of the raw materials required to produce 100 good parts?
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ExampleRaw Material Cost Calculations
2 lb of Raw Material Costing $2/lb Goes Into the Process 1 Finished Part Weighs .8 lbs 2% of Finished Parts are Scrapped in Process
What about the scrap? ____lbs of Engineered or fabrication scrap occurs in production _____lbs of Process scrap occurs after production Total scrap produced _______ lbs 1.2 .016 1.216 2% * .8 lb = .016 lbs
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Raw Material Cost Calculations
2 lb of Raw Material Costing $2/lb Goes Into the Process
The supplier sells the ______lb of scrap for $.75 / lbs
1 Finished Part Weighs .8 lbs 2% of Finished Parts are Scrapped in Process
____ lbs * $.75/lb = $_____ 1.216 1.216 0.912 Total Raw Material Cost: $______ - $______ = $____ 2.04 1.128 0.912
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Example - Labor Cost Calculations
Process has a Gross Pieces per hour of 600 with 80% Efficiency Rate 2 Operators $15 per hour. Operator benefits cost the company $4 per hour
(# of Ops * Fully Fringe Rate) / (Net Pieces/Hr) = labor cost per part ( _____ * ______ ) / (______) = __________
*Gross pcs Hr * Efficiency Rate = Net Pieces Per Hour
________ * ____ = ______
$.07917 .80 480 2 $19.00 480 600
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Burden / Overheads
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So far, we have talked about Labor and Material Costs.
Labor Material Burden SG&A Profit
Selling, General, and Administrative
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Burden / overheads Vs SG&A
Burden or Overhead: Manufacturing costs associated with the production of a part. SG&A Front office, corporate costs.
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Does anyone have some examples of burden and SG&A?
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What’s Included in Burden
Indirect Labor Material handlers Team Leaders Training Maintenance Fringe Benefits Vacation Pay Workers Comp Pension Services & Supplies Operation Supplies Tools Utilities Gas Electricity Water
Salaried Labor Operation Supervisors Engineering Materials Management Fringe Benefits Health Care Insurance Services and Supplies Rent/Mortgage Building/Capital Insurance Depreciation Salaried Labor Supervisors Fringe Benefits Workers Comp Health Care Insurance Pension Services and Supplies Telephone & Communications
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Allocating Burden
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Allocating Burden to Part Cost Simplified
Net Pieces 2,000,000 Burden Cost $8,900,000 Burden Cost Per Part $4.45
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However Different part designs Different mfg processes Multiple plants
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Cost Allocation – Spreading the costs around.
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Burden/Overhead Cost by Department Total Cost
- Inj. Molding
$4,500,000 Welding $2,000,000 Assembly $2,400,000
- 1. Costs are assigned to departments or individual machine
types.
- 2. The total machine hours are calculated for each group.
Allocating Cost of Goods Sold
Total Machine Hours Available 45,000 30,000 100,000 Cost per Hour $100.00 $66.67 $24.00
Costs Machine Hours Burden Cost Per Hour
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Burden/Overhead Cost by Department Total Cost
- Inj. Molding
$4,500,000 Welding $2,000,000 Assembly $2,400,000
1. Costs are assigned to departments or individual machine types. 2. The total machine hours are calculated for each group.
Allocating Cost of Goods Sold
Total Machine Hours Available 45,000 30,000 100,000 Cost per Hour $100.00 $66.67 $24.00
Costs Machine Hours Burden Cost Per Hour
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Burden/Overhead Cost by Department Total Cost
- Inj. Molding 50 ton
$500,000
- Inj. Molding 100 ton
$1,500,000
- Inj. Molding 200 ton
$2,500,000 Welding $2,000,000 Assembly $2,400,000
Burden costs will vary by machine size. Allocating Cost of Goods Sold
Total Machine Hours Available 10,000 15,000 20,000 30,000 100,000 Cost per Hour $50 $100 $125 $66.67 $24.00
Suppliers who do not recognize this will: ▪ Be uncompetitive on small machines ▪ Lose money on large machines
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How wrong is a supplier’s quote if they used an overstated cost of $100 per hour when the cost should have been $50 per hour and the part takes .5 machine hours to make?
Allocating Cost of Goods Sold
Burden cost per hour / number of parts produced per hour = burden cost/part They quoted: $100 / 2 = $50 They should have quoted: $50 / 2 = $25
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Burden Costs
Labor Material
Burden
SG&A Profit
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Fixed and Variable
Fixed Cost Variable Cost
As volume increases or decreases generally these costs increase or decrease by proportional amounts. Examples:
Material Cost Direct Labor Cost Consumable tools & MRO
Stay the same regardless of the part volume. Examples:
Building rent Interest payments Software costs
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What’s Included in Burden
Variable Burden
Indirect Labor Material handlers Team Leaders Training Maintenance Fringe Benefits Vacation Pay Workers Comp Pension Services & Supplies Operation Supplies Tools Utilities Gas Electricity Water
Fixed Burden
Salaried Labor Operation Supervisors Engineering Materials Management Fringe Benefits Health Care Insurance Services and Supplies Rent/Mortgage Building/Capital Insurance Depreciation
Variable & Fixed Burden
Salaried Labor Supervisors Fringe Benefits Workers Comp Health Care Insurance Pension Services and Supplies Telephone & Communications
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Burden Cost Simplified
Net Pieces Per hour Burden Cost Per Hour Burden Cost Per Part
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Burden Cost Calculations
48 Net Parts
- ut per Hour
(Fixed Burden Rate/Hr + Variable Burden Rate/Hr) / # of Net parts out per Hr = Total Burden Cost ( $75 + $25 ) / 48 = $2.08 per part
Process requires a Fixed Burden rate of $75/hr and a Variable Burden rate
- f $25/hr
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Burden Cost Calculations
40 Net Parts
- ut per Hour
(Fixed Burden Rate/Hr + Variable Burden Rate/Hr) / # of Net parts out per Hr = Total Burden Cost ( $175 + $25 ) / 40 = $5.00 per part
Process requires a Fixed Burden rate of $175/hr and a Variable Burden rate
- f $25/hr
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Burden Cost Calculations - Alternative
Part requires a Net Std Hr
- f 0.02083
(Fixed Burden Rate/Hr + Variable Burden Rate/Hr) * Net Standard Hour = Total Burden Cost ( $75 + $25 ) * 0.02083 = $2.08 per part
Process requires a Fixed Burden rate of $75/hr and a Variable Burden rate of $25/hr
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Variable and Fixed Cost Cost of Goods Sold
Profit Revenue Material Cost Direct Labor Cost Burden/ Overhead SG&A
Variable Cost Fixed Cost
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Contribution Margin
Revenue Contribution Margin
A company sells one product, price: $2.00 Variable cost to produce: $1.25 Contribution Margin: $.75
Variable Cost
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Contribution
# of Units Sold Contribution Margin Contribution $.75 10,000,000 $7,500,000
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Profit
Contribution Fixed Cost Profit
$6,000,000 $7,500,000 $1,500,000 However if volume falls by 33% $6,000,000 $5,000,000 $(1,000,000)
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Profit
Contribution Fixed Cost Profit
$4,000,000 $5,000,000 $1,000,000 The good news….. $6,000,000 $5,000,000 $(1,000,000) Fixed costs are not Fixed!!
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Burden Breakdown – Best Practices
Capture Burden by process type (not as overall plant wide rate) Separate labor fringes from burden rate (if possible) Asks suppliers to differentiate between fixed and variable burden (if possible)
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Burden Issues
Overstatement Inconsistent Quote to Quote Double counted in SG&A and Burden Effective countermeasures:
Perform audit of supplier overhead costs Have suppliers fill out detailed information on burden costs accounts Compare to other suppliers Compare to historical ________________________________
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Burden Checklist
B U R D E N Rates Consistent with previous quotes Rates Consistent with competitors Rates Vary with machine size Rates Do not include employee fringe Rates Do not include items in SG&A
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SG&A and Profit
▪ SG&A Selling, General, and Administrative ▪ Profit Typically accounted for as a % markup of total manufacturing costs
- r as a % of sales.
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SG&A and Profit
1 1 SG&A Markup (Gross) Profit Markup
Sales Advertising Commissions Sales Salaries Travel and Marketing General and Administration Administration Salaries Training Travel Moving expenses Office Supplies The positive gain from an investment or business
- peration after subtracting for
cost of goods sold, or total manufacturing cost Typically it is the amount of money a company designates as required to re-invest in
desired business growth
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SG&A and Profit
In order to understand supplier true SG&A and Profit cost it is important that: All SG&A accounts are correctly captured in SG&A SG&A and Profit percentages are clearly stated
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SG&A and Profit Cost Simplified
Cost of Goods Sold (COGS) SG&A and Profit Markup % SG&A and Profit Cost
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SG&A and Profit Issues
Overstated Double counted with Burden % not going down as business grows Effective counter measures:
Compare percentages with previous quotes Compare percentages with competitor quotes Compare against public record is available (if supplier is publicly traded) Audit Negotiate – many times sales has a range to work to ________________________________
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SG&A and Profit Checklist
Area Items Check S G & A P R O F I T Rates Consistent with previous quotes Rates Consistent with competitors Rates Consistent with financial statements Rates Do not include items in Burden
Case 1 – Capstone Case
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Using Cost Breakdown info to Control Costs
Professional courses to optimize your buying team’s performance
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- 1. Create a cost driver table
Part # Quote Date Supplier Raw Material Cost UOM Gross Wt Net Wt
12348900 1/1/2017 Smith EN 1043 .5400 lb 1.2 1 0909808 3/1/2017 Jones EN 1043 .5200 lb 1.4 .9
Include most important drivers Add data from each quote Add key calculations (e.g., Net wt / Gross Wt.)
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#2 Create an Excel Workbook for Each Part/Supplier
Add a new tab for each RFQ Send this workbook to supplier w/ each Design Change
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- 3. Add the Cost Driver Summary to
Part/Supplier Workbook
Should mirror your Cost Driver Summary for easy cut and paste.
Part # Quote Date Supplier Raw Material Cost UOM Gross Wt Net Wt
12348900 1/1/2017 Smith EN 1043 .5400 lb 1.2 1 0909808 3/1/2017 Smith EN 1043 .5200 lb 1.4 .9
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- 4. Review quote with the supplier
Are the explanations clear?
(will you understand them in 6 months?)
Are the cost changes consistent with:
Suppliers historical quotes Other suppliers quotes
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- 5. Update your Master Cost Driver Summary
Should be a quick Copy and Paste
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- 6. Analyze your Cost Driver Data
Identify inconsistencies Build cost models
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Wrap - up Questions: Next Steps:
Training evaluation On line problems – Thursday
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Understanding and Using Cost Breakdowns
Professional courses to optimize your buying team’s performance
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