My first responsibility was to compose the domestic gross profit statement. I asked where to find the computer so I could begin setting up the spreadsheet. My boss laughed and handed me a columnar pad with thirteen columns and a calculator.
Each month, I used a 20-pound report for each product and transferred the respective product's gross sales, freight, quantity sold, and cost-related expenses onto my paper. I calculated the sales and cost unit by product, added all the information, and produced a gross profit statement. During this process, I needed to explain why any sales or cost unit deviated from budget to $.005.
I realized I was the computer. In this accounting environment, the belief was that computers are good, but people are more intelligent. A spreadsheet can't tell you why. To know why, you must understand the nature and components of unit cost.
A unit cost reflects the costs incurred to produce, store, and sell one unit of a particular product. Unit costs include:
· Fixed costs - depreciation, monthly rents, organizational cost allocations, and any cost incurred whether or not production occurs; and
· Variable costs - labor, materials, electricity, any cost that increases or decreases depending on the output produced.
Total cost/total output equals unit cost. Total cost and total output are usually derived from a budget or forecast and can change annually, quarterly, or monthly. The static unit cost is a "best guess" based on past results used to analyze the variance between static unit cost and actual unit cost. This variance analysis creates awareness of input costs, planned output, and planned productivity.
Input costs are products and services used to create output. Examples of variances are:
· Increase/decrease in cost of material,
· Increase/decrease in freight in,
· Loss of vendor discounts,
· Missed vendor discounts.
Planned output is the estimated number of units. Examples of variances are:
· Material shortages,
· decrease in available labor,
· Equipment breakdown,
· Raw materials spillage,
· production for a customer who later canceled the order,
· Over-production based on incorrect scheduling,
· Overtime required due to unscheduled production,
· Overtime required due to a labor shortage,
· Increase/decrease in labor benefits,
· Increase in hourly wage.
Planned productivity is the number of units produced by the current employees. Examples of variances are:
· Acquisition of new machinery that is less labor intensive,
· Improvements in the production process.
A change in fixed costs can also contribute to the variance. For example,
· Change in fixed cost allocations,
· Increase/decrease in support staff costs,
· Change in monthly depreciation or rents.
Unit cost variance analysis can reveal these changes. Sometimes, poor communication results in an over or understated standard cost unit. These variances also alert management to changes that can be addressed quickly before the end of the next monthly cycle, such as addressing discounts with vendors or finding vendors to supply materials at a lower cost. A monthly cost variance analysis completed within the short closing cycle can increase profit and efficiency.
Each month, I used a 20-pound report for each product and transferred the respective product's gross sales, freight, quantity sold, and cost-related expenses onto my paper. I calculated the sales and cost unit by product, added all the information, and produced a gross profit statement. During this process, I needed to explain why any sales or cost unit deviated from budget to $.005.
I realized I was the computer. In this accounting environment, the belief was that computers are good, but people are more intelligent. A spreadsheet can't tell you why. To know why, you must understand the nature and components of unit cost.
A unit cost reflects the costs incurred to produce, store, and sell one unit of a particular product. Unit costs include:
· Fixed costs - depreciation, monthly rents, organizational cost allocations, and any cost incurred whether or not production occurs; and
· Variable costs - labor, materials, electricity, any cost that increases or decreases depending on the output produced.
Total cost/total output equals unit cost. Total cost and total output are usually derived from a budget or forecast and can change annually, quarterly, or monthly. The static unit cost is a "best guess" based on past results used to analyze the variance between static unit cost and actual unit cost. This variance analysis creates awareness of input costs, planned output, and planned productivity.
Input costs are products and services used to create output. Examples of variances are:
· Increase/decrease in cost of material,
· Increase/decrease in freight in,
· Loss of vendor discounts,
· Missed vendor discounts.
Planned output is the estimated number of units. Examples of variances are:
· Material shortages,
· decrease in available labor,
· Equipment breakdown,
· Raw materials spillage,
· production for a customer who later canceled the order,
· Over-production based on incorrect scheduling,
· Overtime required due to unscheduled production,
· Overtime required due to a labor shortage,
· Increase/decrease in labor benefits,
· Increase in hourly wage.
Planned productivity is the number of units produced by the current employees. Examples of variances are:
· Acquisition of new machinery that is less labor intensive,
· Improvements in the production process.
A change in fixed costs can also contribute to the variance. For example,
· Change in fixed cost allocations,
· Increase/decrease in support staff costs,
· Change in monthly depreciation or rents.
Unit cost variance analysis can reveal these changes. Sometimes, poor communication results in an over or understated standard cost unit. These variances also alert management to changes that can be addressed quickly before the end of the next monthly cycle, such as addressing discounts with vendors or finding vendors to supply materials at a lower cost. A monthly cost variance analysis completed within the short closing cycle can increase profit and efficiency.
