Manufacturing Cost Analysis Basics COST BASICS Manufacturing Cost

Manufacturing Cost Analysis Basics COST BASICS Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Importance Your company wants to make money! Profit and price (and ultimately your salary) depend on how you manage manufacturing costs. You will have to address costs and economics in presentations about your work Manufacturing Cost Analysis 1

Cost Definition: The cash amount (or equivalent) sacrificed to obtain some asset and make it ready for use. Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Cost Definition: The cash amount (or equivalent) sacrificed to obtain some asset and make it ready for use. Example 1: A student pays $200 for their ME 382 Textbook. The cost is $200. Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Cost Definition: The cash amount (or equivalent) sacrificed to obtain some asset and make it ready for use. Example 1: A student pays $200 for their ME 382 Textbook. The cost is $200. Example 2: A real estate investor buys land for $200, 000 and spends $90, 000 to put in streets, utility connections, and divide it into lots. Cost = Manufacturing Cost Analysis Dimensioning & Tolerances 2 1 $200, 000 + $90, 000 = $290, 000

Fixed Costs Definition: A cost that does not change due to increased or decreased production of a good or service. Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Fixed Costs Definition: A cost that does not change due to increased or decreased production of a good or service. Common Fixed Costs: ◦ Rent Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Fixed Costs Definition: A cost that does not change due to increased or decreased production of a good or service. Common Fixed Costs: ◦ Rent ◦ Taxes Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Fixed Costs Definition: A cost that does not change due to increased or decreased production of a good or service. Common Fixed Costs: ◦ Rent ◦ Taxes ◦ Salaries Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Fixed Costs Definition: A cost that does not change due to increased or decreased production of a good or service. Common Fixed Costs: ◦ Rent ◦ Taxes ◦ Salaries ◦ Depreciation Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Fixed Costs Definition: A cost that does not change due to increased or decreased production of a good or service. Common Fixed Costs: ◦ Rent ◦ Taxes ◦ Salaries ◦ Depreciation Example: Shüz, a shoe manufacturing company, increases production by 20% due to higher demand. They still pay $4, 000 each month to rent their large industrial facility. Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Variable Costs Definition: A cost that changes due to increased or decreased production of a good or service. Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Variable Costs Definition: A cost that changes due to increased or decreased production of a good or service. Common Variable Costs: ◦ Labor Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Variable Costs Definition: A cost that changes due to increased or decreased production of a good or service. Common Variable Costs: ◦ Labor ◦ Raw materials Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Variable Costs Definition: A cost that changes due to increased or decreased production of a good or service. Common Variable Costs: ◦ Labor ◦ Raw materials ◦ Waste removal or treatment Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Variable Costs Definition: A cost that changes due to increased or decreased production of a good or service. Common Variable Costs: ◦ Labor ◦ Raw materials ◦ Waste removal or treatment ◦ Packaging Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Variable Costs Definition: A cost that changes due to increased or decreased production of a good or service. Common Variable Costs: ◦ Labor ◦ Raw materials ◦ Waste removal or treatment ◦ Packaging Example: Due to low sales, Sherman Pharmaceuticals slows production by 25%, so the company spends 25% less on buying containers for the medicine they produce. Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Homework Problem (MC 1) Fixed versus Variable Costs What is the definition of cost? State whether each cost below is fixed or variable and explain why you decided to give it your classification. A) Waste Disposal B) Unemployment insurance C) Property Taxes for company facilities D) A company’s electric bill Manufacturing Cost Analysis Dimensioning & Tolerances 2 1

Sources: Cost: ◦ http: //www. businessdictionary. com/definition/cost. html ◦ http: //www. accountingcoach. com/terms/C/cost Fixed Costs: ◦ http: //www. investopedia. com/terms/f/fixedcost. asp ◦ http: //www. accountingtools. com/questions-and-answers/what-are-examples-of-fixed-costs. html Variable Costs: ◦ http: //www. investopedia. com/terms/v/variablecost. asp ◦ http: //www. accountingtools. com/dictionary-variable-cost Images: ◦ http: //www. freeimages. com Manufacturing Cost Analysis Dimensioning & Tolerances 2 1