Professional Documents
Culture Documents
and Productivity
Cost Management
-is the process of planning and controlling the
budget of a business.
Cost Management vs
Accounting
Cost management Accounting
to reduce the costs to provide the
expended by an information that is
organization while needed for good
strengthening the economic decision
strategic position of the making.
firm.
Cost Terminology
Costs - sacrificed resource to achieve a specific objective.
Working out
Observing costs
Budgeting
Planning
Cost Management
Project
Plan
Cost
Controlling
Techniques of Costing
Cost Volume Profit (CVP) Analysis
changes in production/sales volume are the sole cause for
cost and revenue changes.
technique that examines changes in profits in response to
changes in sales volume, costs and prices.
Which products or services to emphasize
The volume of sales needed to achieve a targeted
level of profit
The amount of revenue required to avoid losses
Whether to increase fixed costs
How much to budget for discretionary expenditures
Whether fixed costs expose the organization to an
unacceptable level of risk
P = Selling Price per unit
V= Variable Cost per unit
Q= Quantity of Product sold
F = Total Fixed Cost
Suppose that Magik Bicycles wants to produce a new
mountain bike called Magik Bike III and has forecast the
ff. information:
Q2: How many bikes does the company must sold to obtain a
target Profit of 200,000?
Contribution Margin
- is the amount of money, in percentage or dollars, available
as a result of sales that can contribute to the fixed overhead
costs of the organization.
=
=
=
Contribution Margin Ratio (%)
- Contribution Margin per unit divided by selling price
=
Price per bike =800
Variable Cost per bike =300
Fixed Cost =5,500,000
Estimated Sales =11,400 bikes
Profit =200,000
Compute for the CM, CMu and CMR.
800 300
= 800 300 11,400 =
800
= 5 700 000 = 0.625 100
= 800 300 = 62.5 %
= 500 62.5%
=
Break - Even Point
- Firm has no profit or loss at a given sales level
Price per bike =800
Variable Cost per bike =300
Fixed Cost 5,500,000
Compute for the break even point in quantity and in sales.
CVP Graph for Magik Bicycles Magik bike III
CVP and Income Taxes
Pre - tax profit Profit or Operating Income (OI)
After tax profit Net Income, OI with income tax (NI)
Suppose that Magik Bicycles plans for an after tax profit of
20,000 and its tax rate is 30%. What should be the
operating income of the company?
Operating Leverage
effect that fixed costs have on changes in operating
income as changes occur in units sold, expressed as changes in
contribution margin.
Example:
Sales =9,120,000
Variable cost (11,400)(300) =3,420,000
Contribution Margin =5,700,000
Fixed Cost =5,500,000
OI =200,000
For Q2:
Effects of Sales - Mix on CVP
- The formula presented to this point have assumed a single
product is produced and sold. A more realistic scenario
involves multiple products sold, in different volumes, with
different costs.
Suppose that Magik Bicycles developed three different product,
a small bike for children and youths, a road bike, and mountain
bike. Fixed costs for the company are 14,700,000.
EFFICIENCY
It is the ratio of the time needed to perform a task to some
predetermined standard time.
DEFINITION OF PRODUCTIVITY
1766- First time the word "Productivity" was mentioned in an
article by French Economist Quesnay.
1883- Littre defined productivity as the "faculty to produce"
that is the desire to produce.
1950- Organization for European Cooperation and
Development (OECD) offered a more formal definition of
Productivity as the quotient obtained by dividing output by
one of the factors of production.
BENEFITS OF PRODUCTIVITY
Higher the productivity, more income.
Higher the productivity, the lower the operational cost.
Higher the productivity maximizes the usages of
organizational resources.
Higher the productivity is a sign of organizational
growth, creates goodwill.
Higher the productivity, smoother the operation.
PRODUCTIVITY MEASURES
1. LABOR PRODUCTIVITY
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FACTORS INFLUENCING LABOUR PRODUCTIVITY:
3. MATERIALS PRODUCTIVITY
The resources inputs are a combined value of materials
consumed.
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PRODUCTIVITY MEASURES
4. ENERGY PRODUCTIVITY
The resources input considered is the amount of
energy consumed.
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Direct Cost Productivity
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PRODUCTIVITY MEASURES
5. TOTAL FACTOR PRODUCTIVITY
It is the ratio of net output to the labor and capital input.
=
+
6. MULTI-FACTOR PRODUCTIVITY
Total productivity measure that incorporates all the inputs
required to male a product or provide a service. The inputs
could be grouped in various categories as long as they
determine the total inputs required to produced an output.
=
Where: K= Capital L= Labour E= Energy M= Materials S= Services
PRODUCTIVITY MEASURES
O
TOTAL PRODUCTIVITY =
L C R Q
Where:
O= Total Output
L= Labour Input
C= Capital Input
D= Raw Materials
Q= Other Miscellaneous Inputs
Sumanth Model
The general expression of the productivity can be stated as
follows:
Total Productivity=
Total Productivity= (1 + 2 + 3 + 4
+ )/(H+M+FC+WC+E+X)
In this model:
the price deflation is considered
raw material is not considered as input on the basis
++
Total Factor Productivity=
+ +[ + +]
where:
S= Net sales adjusted (i.e. deflated to base year)
C= Inventory change (raw materials, finished goods and
WIP)
MP= Manufacturing plant (Unsalable products, such as
jigs, fixtures, etc. )
E= Exclusions (materials and services purchased from
outside +depreciation of assets )
W= Wages and salary
B= Benefits
KW= Working capital
KF= Fixed capital
FB= Investors contribution (expressed in percentage)
DF= Price deflator
APC Model
The term profitability is the overriding goal for the
success and growth of any business; it can be defined as
the ratio between revenue and cost.
This model,
Based on the premise that a firm generates profits from
two sources:
Productivity
Price recovery improvements
Productivity
- a measure of real growth changes in physical
input and output quantities.
Price Recovery
- the extent to which input cost or increase is
passed onto the customer (i.e. the extent to which
inflation is recovered through sales price increases)
APC model:
can be regarded as simple measurements that
manufacturers can use easily and frequently
based on the premise that profitability is a function of
productivity and price recovery
Physical
Geographical
Climate conditions
SOCIOLOGICAL
Social customs
Traditions
Institutions
Close ties with land and native place hampered stability and
discipline among industrial labour.
POLITICAL FACTORS
Law and order
Stability of government
Harmony between states
Taxation policies of the government influence
willingness to work
Capital formation, modernization and expansion of
plants
Industrial policy
Tariff policies
Elimination of sick and inefficient units
Economic Factors
Size of the market
Banking & Credit facilities
Transport & communication system