Intended learning outcomes: Present in detail internal labor costs. Produce an overview on tooling costs and general fixed manufacturing costs. Differentiate between variable manufacturing costs and (full) manufacturing costs. Identify general and administrative expenses (G&A) and cost of sales. Describe value added.
Continuation from previous subsection (16.1.4)
Internal labor costs are the sum of the costs for all in-house operations to manufacture the product.
Every internal operation is assigned to a work center,[note 1601] for which two cost rates are established. A cost rate is related to a capacity unit, that is, the unit of measure of the capacity for a work center (mostly an hour).
- The cost rate for variable internal labor costs.This includes the costs for wages, plant utilities, plant supplies used, and so on that are needed to carry out the operation. The cost rate is essentially determined either directly or by measurement.
- The cost rate for fixed internal labor costs. This includes the depreciation costs for both machinery and infrastructure and tools and devices, provided that tools and devices are not depreciated independently of the machinery. It also includes ongoing costs, such as operations management. The cost rate is always calculated at the end of a budget period and is used as the forecast for the next period. The total fixed costs are then divided by the forecast load quantity for the next budget period.
The variable and fixed costs of an operation are calculated by multiplying the standard load of an operation (see Figure 13.1.2.2) by the cost rate for variable or fixed costs.
The tooling costs for an operation are the costs incurred by the use of tools during that operation.
In the past, tooling costs were regarded as part of the fixed costs for a capacity unit. Today, they represent such a large proportion of the costs and often differ so widely for each manufactured product that it is more sensible to set them out separately. The following technique, which accords with the activity-based costing approach (see Section 16.4), provides an illustration:
- The tooling costs per operation are calculated by multiplying the batch size by the cost rate per tool use, which is part of the master data for the tool (see also Section 17.2.7). We calculate the cost rate per tool use by dividing the amount to be depreciated by the expected number of uses of the tool.
- The actual number of uses of the tool (a cost driver) is recorded by the shop floor data collection system during the operation in question and is then stored in the master and inventory data for the tool. We can thus compare the actual number of uses against the budgeted number of uses for the tool. The cost rate can then be adjusted depending on the results of the comparison.
The general fixed manufacturing costs are the (fixed) costs for everything not associated directly with the manufacturing process or production infrastructure.
Typical general fixed manufacturing costs include licenses as well as general planning & control, manufacturing process design, and head of production.
These are usually calculated using one or more percentages that relate to the sum of these costs. The sum of all of the general fixed manufacturing costs is divided by the full cost of goods manufactured mentioned above. Again, this calculation takes place at the end of a budget period and serves as the basis for the forecast for the next period.
Variable manufacturing costs is the sum of all the variable costs (material and labor) of a specific product.
(Full) manufacturing costs, also called cost of goods sold, is the sum of all the variable and fixed costs (labor, material, and overhead) of a specific product or for a given period of time.
In addition to the fixed costs mentioned above, there are also:
General and administrative expenses (G&A) are the sum of (fixed) costs for R&D, administration, marketing and sales, and general management.
G&A are expressed as a percentage in relation to the (full) cost of goods sold. This percentage is calculated by dividing the accumulated G&A by the full cost of goods sold during the budget period, again at the end of the budget period. The result is used as the basis for the forecast for the next period.
The cost of sales is the sum of the costs of goods sold and the G&A for a specific product or for the products sold during a given period of time.
Finally, value-added is an organization’s own output.
The value added of a product is defined as the full cost of goods manufactured minus variable material costs, minus variable external production costs, minus a part of the general fixed manufacturing costs (such as licenses). [note 1602]
The complement of value-added are purchased products or services. This definition of added value also serves as the basis for some aspects of taxation.
The variable costs of goods manufactured serve as the short-term lower limit for the sales price (variable, costing) or partial costing, while the full cost of goods manufactured can be regarded as the medium-term lower limit for the sales price (full costing, absorption costing). The sales price then — ideally — includes a profit margin in addition to the cost of sales. For complete costing, costs must be broken down into all eight cost types for each item. The full manufacturing costs can then be derived simply by adding the cost types together.
Course section 16.1: Subsections and their intended learning outcomes
16.1 Costs, Cost Elements, and Cost Structures
Intended learning outcomes: Produce an overview on actual, direct, and overhead costs. Differentiate between average costs and standard costs as well as between variable costs and fixed costs. Explain the cost accumulation breakdown that is the cost breakdown structure of a product.
16.1.1 Actual Costs, Direct Costs, and Overhead Costs
Intended learning outcomes: Describe actual costs. Differentiate between direct costs and overhead costs.
16.1.2 Average Costs and Standard Costs
Intended learning outcomes: Differentiate between standard costs and average costs. Explain standard cost rates.
16.1.3 Variable Costs and Fixed Costs
Intended learning outcomes: Differentiate between variable costs and fixed costs. Describe step-function costs. Identify full costs.
16.1.4 The Cost Breakdown Structure of a Product: Material and External Labor
Intended learning outcomes: Explain cost accumulation breakdown. Present in detail material costs and external labor costs.
16.1.4b The Cost Breakdown Structure of a Product: Internal Labor, Tools, General Fixed Manufacturing, G&A
Intended learning outcomes: Present in detail internal labor costs. Produce an overview on tooling costs and general fixed manufacturing costs. Differentiate between variable manufacturing costs and (full) manufacturing costs. Identify general and administrative expenses (G&A) and cost of sales. Describe value added.
