For a better organization of the accounting concepts that intervene in the costing process of a product, the labor and the value of materials have been classified as variable costs. In other words, they are the ones that only occur when there is production. If for any reason your company stops receiving orders, to process, and therefore it is forced to suspend production, you will have to fire the operators and you would no longer have to assume these costs.
However, there are other costs that are considered always present. This occurs with the so-called General Expenses and the so-called Administration Expenses, these are the so-called fixed costs. Apart from these, the Depreciation of Machines and Tools must also be counted as one more cost for the conformation of the total cost.
Let's start with the overhead. These are leasing, public services, advertising, transport, stationery, mail services, etc. These, although nothing is being produced, must continue to be paid. If you have kept a more or less organized accounting you will be able to realize what was the value of the general expenses in the past months, so you will be able to get an average of what your monthly budget is.
A little more complex are the administrative costs. These include the personal expenses of the owner manager and can also be followed up monthly to know her average, however not all personal expenses constitute a Fixed Cost. In other words, if you as the owner do not do any work as an operator and your action is purely administrative, the entire value of personal expenses is a fixed cost. In other words, only the value of the time you dedicate to the administration of your company constitutes a fixed cost.
Now, to determine what part of personal spending is fixed cost, you must first estimate how many hours a week you dedicate to your business and how many hours of these you spend with the administration.
- Determine the total hours you work in the month. (The weekly value multiplies it by 4).How many hours do you dedicate to the administration (the weekly value multiplies it by 4).Calculate the hour value of the manager-owner. Dividing the monthly personal expenses between the hours worked per month. Now what is the value of the time that you spend to the administration multiplying the value of the hour by the number of monthly hours dedicated to this activity.
Now if we can know exactly how much the fixed costs are worth since they are equal to the general expenses plus the value of the time of the owner manager spent in the administration of the business.
If you follow this order, you can use these data to calculate the average fixed costs with which you will be able to contribute in the coming months, and this will facilitate the costing function.
Now, we can find the fixed cost of the product for which it is necessary to follow the following steps.
- Determine the total monthly hours that actually apply to production in your company. If you have a fixed number of workers this is determined by multiplying 180 by the fixed number of workers. In the event that your employees are not all fixed, try to estimate as accurately as possible the total number of hours actually worked, adding the average hours that each of the operators works.Then, if you divide the total fixed costs by this amount total hours, the result will be the fixed cost per hour actually worked. If you take the Fixed Cost For Every Hour Effectively Worked and multiply it by the hours the product requires to be manufactured, the result will be the fixed cost of the product.
This means that the more effective hours the company works the lower the fixed cost per hour and therefore the product cost will also be lower. With which it allows you to compete in better conditions.
This is one of the reasons that big companies when sales are good work to their full potential. They even increase production shifts to night hours.
Before finishing this part, we must clarify that you should not make these calculations every time you make a quote, since fixed costs vary very little from month to month, in the same way that the hours actually worked also tend to remain stable. However, it is recommended that you be aware of the external effects of regulations and fees that may influence your fixed costs so that you can recalculate. It is also recommended to be aware of internal changes in the production structure that may vary your effective hours. Anyway, don't forget to update your data every two or three months.
To finish, let's see a section on the depreciation of machines and tools.
The concept of depreciation is very simple, as nothing is eternal, even machines and tools, so we must consider their wear over time and according to their use.
In this depreciation process, they transfer value to the products, therefore it is necessary that this wear is charged to the costs of the product.
To calculate how much you should charge at the cost of the product for depreciation do the following.
- Estimate how long the useful life of your machines and tools will last, if you keep up with the current production rate. If you take great care of your equipment, this period will be longer. Calculate an average to facilitate the accounts. Multiply the estimated time in months by the hours actually worked per month. Divide the value of your equipment in general by the previous amount and you will obtain the depreciation po working hour.
This last value should be increased to the costs of your product to consider the wear and tear of your machines for every hour that you spend manufacturing that product.
