Understanding and Using Cost Breakdowns

transcript

Understanding and Using Cost

Breakdowns

Professional courses to optimize your buying team’s performance

APD Personnel

Main Presenter – Jeoff Burris

Producer Jon Homrich

Introductions

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

We lever a network of >10,000

supply chain professionals, and

have both onshore and

offshore 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.

PeopleTools &

TechnologyIntelligence

Elevating the Role of Purchasing

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

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

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

Poll Question

Yearly Volume (11) Currency (12)Exchange

Rate per USD

USD 1.0000

Max. daily production (18)

Packag.responsib. (80)

Make part /

Drawing number

Make part

description

Quantity/Assy

Sub Supplier

Country of

Origin

Unit price/UOM

Gross usage/part

usage/part

Scrap Reclaim

Cost/Unit (30)

Total Raw Material

Cost (31)

Total Cost

56789123 Tie bar NA NA NA lb 0.4350 1.8375 0.9039 2.0% 0.0079 0.0542 0.7647 12.0% 0.0918 0.8565

56789123 Tie bar NA NA NA lb 0.4350 0.4500 0.2425 2.0% 0.0021 0.0542 0.1884 12.0% 0.0226 0.2110

56789123 Tie bar NA NA NA lb 0.4350 0.7600 0.4630 2.0% 0.0040 0.0542 0.3211 12.0% 0.0385 0.3596

56789123 Tie bar NA NA NA lb 0.4350 1.1200 0.4189 2.0% 0.0036 0.0542 0.4589 12.0% 0.0551 0.5140

56789123 Tie bar NA NA NA lb 0.4350 0.2400 0.1543 2.0% 0.0013 0.0542 0.1018 12.0% 0.0122 0.1141

56789123 Tie bar NA NA NA lb 0.4350 0.9800 0.3527 2.0% 0.0031 0.0542 0.4008 12.0% 0.0481 0.4489

0.0000 0.0000 0.0000 0.0000

* Unit of measure (kg, pound , etc) Total Raw Material: 2.2358 0.2683 2.5041

Program name (8) Part description (9)

2012 7/25/2011

Supplier (1) Drawing Number (2) Revision (3) Part Number (4) Price basis year (5)

OEM's Name (7) Life-time volume (10)

Offer date (6)

ABC Company 56789123 99999999

Payment Terms (13) Plant (14) Suppliers production site (15) Production batch size (16) Number/ shifts (17)

Safety Stock quantity (62) Delivery terms (65) Delivery frequency (78) Delivery lot (79)

NSDSM Adrian Mexico 10,500

Raw MaterialsItem 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

Tie Bar Assembly 2,500,000

500,000GM GMT 900

What percent of the time are you asking suppliers to

complete the Inteva Detailed Cost Breakdown?

Poll Results

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

Profit

PriceProfit

Establishment of Pricing

Buyer Focus CostsPrice

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

What are the Positives and

Negatives of getting detailed cost

breakdowns from suppliers?

Let’s Use the Chat Feature to Share

What are the Positives

and Negatives of getting

detailed cost breakdowns

from suppliers?

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

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

What determines whether a buyer uses a Market or Cost Based approach?

Interest

Ability

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.

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.

Global Sourcing - Market vs Cost Approach

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

MarketInitial Sourcing with

competitive pressure

– no cost knowledge

Market

Without cost knowledge,

price creep occurs

Market

Market testing/negotiations

used to reduce price

Market

Cycle repeats

Resourcing at the peaks captures market pricing

Market

However, the market testing

fails to capture the true

The Case for Cost

Breakdowns

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.

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.

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.

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

Cost Breakdowns

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.

5 Main Areas of Cost

Material

Burden

SG&AProfit

Selling, General, and Administrative

Cost of Goods

SoldProfit Revenue

Material

Direct

Labor Cost

Burden/

Overhead

Material Cost

Material

Burden

SG&AProfit

Material Cost Simplified

Material

Cost per

Unit of

Measure

Amount

Material

Material Cost

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 of procurement and storage.

Purchased materials are scrapped.

Raw Materials - Purchased Parts

Raw Materials /

FabricationPurchased

Parts/Services

Transformed in Manufacturing Process

Assembled in Manufacturing Process

Services provided by an outside company

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

1 lb of Raw Material Costing $2/lb Goes Into

the Process

What about the scrap?

.1lb of engineered or fabrication scrap occurs 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

the ProcessThe supplier sells the .109 lb of

engineered scrap for $.50 / lbs

$2.02 - $.0545 = $1.9655

.9 lbs

This Scrap Resale reduces the material cost

.109 lb * $.50/lbs = $.0545

The process produces .1 lbs of engineered scrap and .09 lbs

of finished part scrap.

Example - Raw Material Cost Calculations

the Process

.8 lbs

What is the cost of raw material the supplier must purchase to produce

1 good part?

$_____ per part * (1 + ___) = _______3.00 .01 3.03

ExampleRaw Material Cost Calculations

the Process

.8 lbs

____lbs of Engineered or fabrication scrap occurs in production

_____lbs of Process scrap occurs after production

Total scrap produced _______ lbs

1% * .8 lb = .008 lbs

the Process

The supplier sells the ______lb of scrap for $.75 / lbs

.8 lbs

____ lbs * $.75/lb = $_____

0.208 0.156

Total Raw Material Cost:

$______ - $______ = $____3.03 2.8740.156

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!!!!

How Suppliers Incorrectly Quote

Incorrect/Inaccurate Quoted Weights

Effective counter measures: Physically weigh parts yourself and compare

against quoted weight.

Compare quoted weight to CAD data weight.

________________________________

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.

________________________________

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.

________________________________

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

________________________________

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.

________________________________

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

________________________________

Different Effective Dates

Effective counter measures: Question supplier about the dates especially

on new programs.

Specify effective dates in RFQ.

________________________________

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. ________________________________ ________________________________ ________________________________

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.

________________________________

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.

________________________________

Potential issue: ________________

________________________________

Other Potential Issues

Raw Materials Check List

Area Items Check

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

ScrapScrap % 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

Purchased Part Checklist

Area Items Check

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

Material

Burden

SG&AProfit

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.

Labor Cost Simplified

Labor Cost

per Unit of

Labor Time

Required for

Production

Labor Cost

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

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.

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

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

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

Example - Labor Cost Calculations

Process has a Gross

Pieces per hour of 700 with 85% Efficiency

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

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

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

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

Overstatement of Inefficiencies

Effective counter measure:

Have supplier breakdown their inefficiencies. Look for items that stand out from array of quotations received.

Compare to other suppliers.

Compare to historical quotes.

________________________________

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. ________________________________ ________________________________ ________________________________

Including Indirect in Direct

Perform audit of supplier operations to determine which employees are direct and indirect.

Understand where indirect employee costs are allocated, typically accounted in overhead.

________________________________

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.

________________________________ ________________________________ ________________________________

Labor Checklist

Operator Wage Rates Consistent with previous quotes

Operator Wage Rates Consistent with industry norms

Operator Wage Rates Consistent with regional norms

Operator Wage RatesFringe 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

Session 2

Session 1 – July 11 - Raw Material and Labor

Session 2 – July 18

Burden and SG&A

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

5 Main Areas of Cost

Material

Burden

SG&AProfit

Example - Raw Material Cost Calculations

2 lbs of Raw Material Costing $2/lb Goes Into

the Process

.8 lbs

How many parts must the supplier plan to produce if the supplier needs 100 good finished parts?

$_____ 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?

ExampleRaw Material Cost Calculations

the Process

.8 lbs

____lbs of Engineered or fabrication scrap occurs in production

_____lbs of Process scrap occurs after production

Total scrap produced _______ lbs

2% * .8 lb = .016 lbs

the Process

The supplier sells the ______lb of scrap for $.75 / lbs

.8 lbs

____ lbs * $.75/lb = $_____

1.216 0.912

Total Raw Material Cost:

$______ - $______ = $____2.04 1.1280.912

Example - Labor Cost Calculations

Process has a Gross

Pieces per hour of 600 with 80% Efficiency

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

Burden / Overheads

So far,we have talked about Labor and Material Costs.

Material

Burden

SG&AProfit

Burden / overheads Vs SG&A

Burden or Overhead:

Manufacturing costs associated with the

production of a part.

Front office, corporate costs.

Does anyone have some examples of burden

and SG&A?

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

Allocating Burden

Allocating Burden to Part Cost Simplified

Net Pieces

2,000,000

Burden Cost

$8,900,000

Burden Cost

Per Part

However

Different part designs

Different mfg processes

Multiple plants

Cost Allocation – Spreading the costs around.

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

CostsMachine

HoursBurden Cost

Per Hour

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.

Total Machine

Hours Available

45,000

30,000

100,000

Cost per Hour

$100.00

$66.67

$24.00

CostsMachine

HoursBurden Cost

Per Hour

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.

Total Machine

Hours Available

10,000

15,000

20,000

30,000

100,000

Cost per Hour

$66.67

$24.00

Suppliers who do not recognize this will:

▪ Be uncompetitive on small machines

▪ Lose money on large machines

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?

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

Burden Costs

Material

Burden

SG&AProfit

Fixed and Variable

Fixed CostVariable 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

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

Burden Cost Simplified

Net Pieces

Per hour

Burden Cost

Per Hour

Burden Cost

Per Part

Burden Cost Calculations

48 Net Parts

out 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 of $25/hr

Burden Cost Calculations

40 Net Parts

out 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 of $25/hr

Burden Cost Calculations - Alternative

Part requires a Net Std Hrof 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

Variable and Fixed Cost

Cost of

Goods SoldProfit Revenue

Material

Direct

Burden/

Overhead

Variable CostFixed

Contribution Margin

RevenueContribution

Margin

A company sells one product, price: $2.00

Variable cost to produce: $1.25

Contribution Margin: $.75

Variable

Contribution

# of Units

Contribution

Margin Contribution

$.75 10,000,000 $7,500,000

Profit

ContributionFixed

CostProfit

$6,000,000$7,500,000 $1,500,000

However if volume falls by 33%

$6,000,000$5,000,000 $(1,000,000)

Profit

ContributionFixed

CostProfit

$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!!

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)

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

________________________________

Burden Checklist

Consistent with previous

quotes

Rates Consistent with competitors

Rates Vary with machine size

Do not include employee

fringe

Rates Do not include items in SG&A

SG&A and Profit

▪ SG&A Selling, General, and Administrative

▪ Profit

Typically accounted for as a % markup of total manufacturing costs or as a % of sales.

SG&A and Profit

SG&A Markup (Gross) Profit Markup

SalesAdvertisingCommissionsSales SalariesTravel and Marketing

General and AdministrationAdministration SalariesTrainingTravelMoving expensesOffice Supplies

The positive gain from an

investment or business

operation 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

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

SG&A and Profit Cost Simplified

Cost of

Goods Sold

(COGS)

SG&A and

Profit

Markup %

SG&A and Profit

SG&A and Profit Issues

Overstated

Double counted with Burden

% not going down as business grows

Compare percentages with previous quotes

Compare percentages with competitor quotes

Compare against public record is available (if supplier is publicly traded)

Negotiate – many times sales has a range to work to

________________________________

SG&A and Profit Checklist

Area Items Check

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

Using Cost Breakdown info

to Control Costs

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.)

#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

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

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

5. Update your Master Cost Driver Summary

Should be a quick Copy and Paste

6. Analyze your Cost Driver Data

Identify inconsistencies

Build cost models

Wrap - up

Questions:

Next Steps:

Training evaluation

On line problems – Thursday

Understanding and Using Cost

Breakdowns

Understanding and Using Cost Breakdowns

Documents