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by
Bob Glenister
Material cost based costing : This
is by far the most common form of costing. How many times have you
heard your kids say but if I bought the material for that dress I
could make it for half the price? Now after Mom’s been riding around
the half the day finding the right buttons and the zipper etc Did that
dress cost half or more than five times the price?
Problems with material based costing: 1.
Inferior materials get used. Three year
instead of
seven year.( In the dress example a cheaper textile) Which leads to
more costs for example weeding time, vinyl failure which leads to
reworks. More about this later.
2. Its the easiest way
to go out of business. None of your fixed costs are recovered. Fixed
costs????, don’t worry I will be covering this just now in great
detail) In the dress example Mom’s time, (never mind her headache),
petrol, wear and tear on the car, phone calls, her lease on the sewing
machine and her sewing room rent.
X cents
a millimetre: The
next most common form of costing method. 3c a millimetre, 5c a
millimetre. 20c a millimetre. This costing method was developed in the
USA (cents per inch) and still has some adherents. It was developed as
a short cut method of costing or rule of thumb. Originally it did take
fixed costs into account but soon because, people forgot its origins
it has developed into a materials costing methodology. So I must be
making a profit because I sell a 50 mm letter for R1.50 but the square
meterage of that letter is only 7 cents for economy vinyl and 14 cents
for premium vinyl. You could be making a profit or you could be making
a massive loss. (fixed costs are being covered but what are my fixed
costs for this letter?)
Is it better to know
with some surety that you are making a profit on every sign or to
discover at the end of the month that you have made a huge loss
Margins were high: At
20 cents a millimetre, did it matter that your scrap ratio was 50% or
that your returns were 30% or your reworks were 25%. No it did not
because there was so much fat in the price that you could be a
eight-legged lizard and you could still make money. Competition was
almost non-existent. Customers did not have choice at all pay the
price or leave me alone.
Immature Industry: The
industry was just beginning, less players, again less competition.
More importantly though was that the processes were unknown and due to
the unknowns a lot of fat was added to safeguard your profit.
So what does it cost to run a sign shop? This
is the fun part, because tomorrow you will go back and apply this to
your company and immediately be able to reap the rewards. (and don’t
let any accountant tell you it is difficult because it is easier than
falling in love).
Fixed Costs: (I
have mentioned them enough times tonight to make you curious.) The
simplest definition of fixed costs is, those costs you have to pay
even if you do not make one single sign.
Examples:
Rent, leases,
salaries etc. Please do not make the mistake and lump salaries into
variable costs. This might have been applicable in the days you could
hire and fire on the spot but those days are long gone. Temporary
labour wages (daily paid) are however variable costs. I have included
in these notes a complete list of fixed costs that you could allocate
to your company. If possible please fill in at least six months of
figures to obtain an average.
Variable costs: These
are costs that arise from you making signs for example, nuts &
bolts, cleaning materials, solvents, vinyl, Perspex, chromadek, etc.
We break these into two groups:
Multiple use Variable
costs: These
are materials or services that you will use on more than one sign
example cleaning cloths, a box of bolts, solvents, gloves, delivery
charges and where the relative cost of these materials does not
warrant a careful check for each and every sign.
Single use materials: These
are materials and services specifically used to create the sign.
Examples here are
vinyls, Perspex, chromadek, routing services, printing services,
freight etc. So how much does that 15 minute break, drinking your tea
or beer cost you.
First we have to
calculate our fixed costs: I
am going to do a rough calculation just to describe the principles
involved. Please go through your figures carefully and allocate them
accordingly. Monthly figures (Please use at least six months of
figures to obtain an average)
Fixed Costs: (Example as per illustration)
Advertising R300.00
Accounting R 50.00
(Accrual)
Depreciation R 150.00
Finance Charges R
1250.00
Hire of equipment R
150.00
Insurance R 200.00
Interest Paid R 55.00
Legal R 100.00
Marketing R 200.00
*
Motor Expenses R 1000.00
Repairs and Maintenance
R 150.00
*
Printing and Stationary R 800.00
*
Rent R 500.00
*
Salaries R
15000.00
Telephones R 1500.00
Tools R 150.00
* Travel
R 300.00
R21 855.00 a
month fixed costs.
This calculates out to R993.00
per day or R124
per hour R2,00
per minute.
We now know that our
beer cost us R3.80 (Variable cost) for materials and R30.00 for the
fifteen minutes we spend consuming it. (Fixed Cost) Our Cup of tea is
R0.30 (Variable Costs) cents for materials R0.01 cents for the water
(global variable costs) and R45.00 for the 15 minutes consumption and
7.5 minutes we spent making it. (Fixed Costs) Lets take a simple car
door sign.
These figures are
based on a straight line production process
Customer arrives car
Being friendly 2 minutes
R 4.00
Measuring 3 minutes R
6.00
Discussing design 10
minutes R 20.00
Doing design Corel
Draw 60 minutes R120.00
Casmate Sign Blazer
Flexi 30 minutes R 60.00
Material Premium film R
19.40
Economy film R10.08
Cutting Design 10
minutes R 20.00
Weeding (quick weed) 2
minutes R 4.00
Weeding (cheap vinyl) 5
minutes R10.00
Application tape R 2.00
Application of Sign 25
minutes R 50.00
Cleaning liquids 10 ml
benzine R 0.20
Cleaning cloth 2% R 0.01
Tissues blades etc R
0.10
Getting cash from
customer 3 minutes R 6.00
Total Cost of sign R
191.71
Total Material Cost
R 21.40
Suggested Selling
price of sign R 343.00 & VAT
Do we really want do this on every sign? NO!!!
Is there no easier way,
yes there is;-
Do You really want to
do this everytime
No,
no, no!!!
Is there an easier
way?
Yes there
is!!! We first calculate our costs per hour fixed and
variable and then it is very very easy to calculate what it costs to
manufacture a sign!
Fixed Costs: We
know our fixed costs for the business is R21 855.00 per month it now
very easy to calculate what a sign is going to cost us in fixed cost
to make. What about the two variable costs Global and straight
variable costs?
Variable costs: These
are relatively easy to calculate. You need 3 meters of vinyl some
chromadek hire scaffolding, outside printing etc.. Please keep these
in a data base, could be written or electronic. Make sure it is easy
to access for yourself (and everyone else more about this when we
discuss parallel processing) Please allow for scrap. 10% is probably a
good average but try get this down as low as possible.
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Global variable costs: Here
we include anything that gets consumed by the company as and when you
make signs but is to difficult or just a pain in the ass to calculate
how much gets used in the sign
These include:
Bank charges
Bad debts
Discounts given
Cleaning materials
Mounting materials
Etc
Add your six month
figures together for these costs and now average them.
In our example we assume
six month figure of R12 000.00 Which gives us 12 000.00 divided by six
or R 2 000.00 per month (12 000 divided by six) Which calculates out to
R91 a day (2000 divided by 22) This comes to R11.36 an hour (91 divided
by 8) and finally to 19 cents a minute (91 divided by 60) So now when a
customer wants car door sign made we know it takes one and a half hours
(90 minutes) to make this type of sign (total company time).
So now it is easy:
90 minutes times R2.00
fixed costs R180.00
90 minutes times R0.19
global variable costs R 17.10
Variables costs R21.40
materials plus 10% scrap R 23.54
Total cost R220.64
Suggested Selling price R393,30 & Vat
Efficiency:
The first problem
with the above example is that we presume that you use every minute
productively and that you get paid for every minute and we know that’s
not true. We get customers who just drop in to chat, we spend hours
quoting customers and not getting the business, we drink tea and we have
a beer occasionally, I hope. How do we make sure that we recover these
costs.
Solution two: we
measure our efficiency. How?
We take our total costs
for the day and divide them by our total billings. In the above example
Fixed costs daily R 993
per day
Global variable costs R 91
per day
Material costs R 23.54
Total cost R 1 107.54
Total billed for the day
R393.30
Efficiency ratio: 393.30
divided by 1 107.54 = 0.35
The moment we
see a zero in front of the efficiency
ratio we know we are making a loss!
What should we have sold
the job for a minimum of R1 107.54 but at this price we only get our
costs back. The correct price would be 393.30 divided by 0.35 or R1
122.85 to make our profit back. If we produced six of these signs and
billed them the same day.
6 x 393.30 = R2359.80
Efficiency ratio then is
2.13, you are rolling in the money!!!The second problem with this
example is parallel processes. When you are drinking tea and cutting at
the same time you are parallel processing.
Think of Pick and Pay.
Why can they sell at prices so much lower than the corner store. The
corner store is like you, single process line. Pick and Pay on the other
hand have thousands of transactions occurring at any one single moment
country-wide.
The power of parallel
processing! You are busy all the time you don’t have two seconds to
your name but every now and then you really need that cup of tea or
beer. Your efficiency just does not want to come close to one and you
are turning away customers. What can you do?
Add
Costs! By
employing a person to make tea and answer the phone, what do you do. You
add fixed cost of R2500 a month Your fixed cost goes up by R14.00 an
hour. But most importantly your ability to bill more a day rises
dramatically. Your efficiency ratio now improves which means you can
lower prices if you have to.
Automate:
Add a
machine that allows you to do more things at the same time a banner
printer can be left unattended to print the banner while you type out a
quote etc etc.
Remember measure your
efficiency daily and you will immediately see if the added costs are
improving your company and helping you to focus.
* AFTER
READING ALL OF THIS, WHAT IS BETTER - THAT TO START YOUR OWN PART-TIME
HOME-BASED BUSINESS IN CUTTING DOWN ON YOUR COST & OVERHEADS
Differentiation
The art of making real profits
and making the customer come back for more. (It is easier to give
something away than to sell it for what it is worth)
The welsh tree frog a
lesson in differentiation. During mating season the male Welsh tree frog
emits a series of chirps that attract the females to be partnered. A
select group of males however, have added a single base note in the
chirp call.
These males, bed on
average nine more lovely ladies than the males who issue the standard
chirp. This is the art of differentiation in a nutshell, the same
product but packaged to suit the customer.
We all know what it is
like to shop at a discount store like Macro. Finding someone to help is
difficult if not impossible. If you are successful, they brush you off
with a piece of mumbo jumbo that leaves you more confused than you were
before. So why are they successful? They are playing the giving away
game, where the number of people entering the store knowing what they
want to buy and fully understanding the item they are buying, outweigh
the number of customers who are not informed and simply walk out of the
store in disgust.
Your partner (you would
never do this) always buys product from a certain store. When questioned
"Why do you buy there, it is so expensive?" the answer is a
simple ‘I get better service" or "The people are so
friendly" or "Oh I
don’t know they are
just good to us" or thinks, not that he or she will admit,
"The salesperson is so charming and makes me feel good when I shop
there".
What is your business
practicing? "Differentiation"
The first key for
differentiation is therefore "Give the customer what they need in a
non tangible form."- A smile, information, help, advice, or a
shoulder to cry on. These are small things but will keep your customers
coming back at any reasonable price.
The second part of
differentiation is specialization. The tree frogs who learnt the extra
base call were saying. "Hey ladies I have learnt this new mating
call because I have taken the time to be an expert in how to please
you."
To identify your
specialist area take a good look at the people who work for you,
including yourself, and determine the work that you are particular proud
of and again identify the work you are particular ashamed of.
Once you have determined
this, make sure you study up about the areas you are proud of until you
are thought of as an expert in this field.
Secondly the ‘ashamed
of areas ‘ determine whether you wish to continue with this aspect of
work because it is dragging all your prices down.
Either get rid of it or
study and practice like crazy to become an expert here too. Once you are
viewed as an expert you will be surprised how little argument you will
get on price.
Hope you all turn into
Welsh tree frogs and live happily ever after……..
Most of all have fun. I have never met a successful person who was
not passionate about what they did. If you not enjoying it, you are not
going to make money doing it!
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