CHAPTER 5

Cost
1

CHAPTER CONTENTS

Section 1. The Category Of General Cost Section 2. Calculation Method Of Unit Cost

Section 3. Break-even Analysis

Section 4. Management Technology Of Reducing Cost

PREFACE

The most basic purpose for enterprise existing is to seek profit. The profits of enterprises is equal to the balance of the total income deducting all the cost and expense. Total revenue is the sum of the company price multiplying the selling numbers. The cost is the sum of all the expense of the company.
3

(5.1) MANAGERIAL WISDOM: NUMERAL MANAGEMENT

Management authority of the company tends to use financial data for the "visible hand" which means the method of rely on numeral management" to control.

Remark

Modern managers have to "rely on data management. We must understand the financial statements, such as profit and loss statement, statement of changes in shareholder's equity, balance sheet and cash flow statements and etc. Note: The operator's hands management: one hand seize the numbers", and the other hand, seize peoples heart
4

REMARK CONT.

The visible hand mainly grasps figures (budget, revenue, cost, payroll, expense, efficiency, time, timely delivery and profit). The invisible hand mainly grasps the human heart (leadership, motivation, quality, communication, and brand).

The most important number concepts should be the concept of compound interest. The details can be seen in Table 5.2. As for figures, you should suspect in no doubt". While for the human heart you should not suspect in doubt.
5

PROFIT EQUATION:

Profit = total revenue - total expense

Usually by doubling (100%) the sales revenue (increment income) and reducing by 10% cost (reduce expenditure), it can achieve the same goal of doubling the profit (assuming the company's net profit margin 5%).
In the business world, reducing cost (reduce expenditure or cost management) is the core of the management. The strategy of low cost is to reduce product cost as much as possible. The key point is that seek profit based on the cost, carefully figuring the input cost in order to obtain the profit.
6

(5.2) MANAGERIAL WISDOM:

MAKE MONEY WITH ONE'S CAPITAL
Once a seigneur wanted to unit each country and prepared to attack State of Qi. The king of Qi was afraid and worried, in a hurry he calling his allegiant, and said: The people with the resourcefulness please contribute to me. Dr. Chunyu Kun looked up to the sky and laugh, but without answering.

King Qi angrily said "How can you make my word as joke? Chunyu Kun said: "How do I dare to consider your word as joke! What I laugh at is my neighbor. Surprisingly just with a bowl of rice, a bottle of wine and three small fish, he prayed to God. Hoping that his 0.3 m of dry land can produce 5000 kg millet, and 0.5m paddy field can produce 100 cartfuls of corns, and every year not only there is surplus, but also can be left to future generations.


In

Remark

an efficient-based society, it always hopes that we can obtain maximize revenue with the lowest cost. Business is like a race. Make money with one's capital is a basic criterion; it is impossible for the mean enterprise obtaining some outstanding achievement.

(5.3) MANAGERIAL WISDOM: THE COST CONCEPT

The joint venture (1992) in Xinjiang invested by Dingyi company and China official, due that an employee who travels to Beijing for business may give inflated figures in a report about RMB 550 (about US$100). The Vice Chairman of Chinese nationality, he personally flies to Beijing to investigate, staying in a five-star hotel for a week. As a result find out nothing defected , while the only expense for the hotel accommodation is more than RMB 5,500 (about US$1000).
9

REMARK

In order to adapt modern competition and environment, the urgent task on hand is to educate Taiwanese and Chinese managers and general staff cost consciousness concept. No longer with mentality waiting for, " eating from the same big pot "; right managers and managers to strengthen the concept of the cost, it is never too late or excessive to strengthen the cost concept to executive and managers.

10

SECTION 1. THE CATEGORIES OF THE GENERAL COST

11

(5.4)MANAGERIAL WISDOM: AVARICIOUS COST

A dog with a piece of meat in his mouth walked onto the wooden

bridge. He saw his shadow in the water, but he considered him as another dog, and the meat in that dogs mouth appear to be twice bigger than his own. The dog thrown his piece of meat, ferociously attacking the dog in order to capture the bigger meat from there. As a result he got nothing. The meat he contested in the water was just a shadow. The other meat that originally belonged to him has drifted away by the water.
Remark
If

the action is only because of profit but regardless of the consequence, usually gains cannot make up for loss. When doing anything, you must not only look at their surface. It is only after have a better understanding of the whole thing, that one can make a rational decision, in order to reduce the risk of failure.

12

1.1 COST CATEGORY BASED ON THE DIFFICULT LEVEL OF THE ATTRIBUTION

a)

Direct cost: It means the cost item which can be directly traced back to these matters, the major cost of manufacturing. Indirect cost: It means the project only by sharing or allocating can be reckoned in cost, including manufacturing expense and non-manufacturing cost.

b)

13

(5.5) MANAGERIAL WISDOM: HEALTH ALLOWANCE

American Hospital has a unique financial expenditure in operation, which is paid the employee health allowance.

The hospital makes a regulation, after staff completing the hospital's health requirements, all who can receive the health benefits.
Health provision includes a number of useful activities, and each activity has its own corresponding allowance, such as US$0.96 per mile for swimming, US$0.24 per mile for running, $0.96 per hour for dancing, etc. This welfare largely increases the enthusiasm of all staff in company to join in physical exercise.

14

(5.5) MANAGERIAL WISDOM CONT.

A garden near the building of corporate headquarters becomes employees running sites. The general manager of the company also makes the first demonstration, running to and from work instead of the vehicle, going there and back by jogging up to 7 miles (11.2 kilometers). The fund of the hospital uses to purely encourage staff to maintain good health, with an average of up to $500 per person per year. But compared to tangible and intangible benefits acquired by the company, it is trivial.

15

REMARK

The operators in U.S. hospital are visionary. They clearly realize that the health is the only wealth to staff; without a healthy body, not only one lack of enjoyment of life, but also the business will achieve nothing, let alone win in the competition.

Why do not you establish similar system for your business, school, hospital or organization?

16

(5.6) MANAGERIAL WISDOM: UNCONSCIOUS PRICE

Mr. Chang met Lin who is fond of drinking in the street. Seeing burn mark on his both ears and cheeks, so he asked him what happened? Lin said: "I go home shortly after drinking, the phone ringing, while I mistake the iron on the table as the phone and answer! Mr. Chang asked again: "then what happen to your ear and face in your left? Lin: "Oh! After a while, the telephone rang again!

Remark

Dealing with an issue, we must keep a cool head. If not, not only you will get half the results with twice the effort and often you will make thing from bad to worse, seriously it may cause a lifetime regret

17

1. 2 THE CATEGORY OF THE MANUFACTURING COST

1.2.1 Product cost

to count on individual product, such as the timber used by desk.

a) Direct material: It refers to the material which can be traced

b) Direct labor: It refers to the labor cost which makes direct contribution to the production of the product, such as the image of the assembly line operator. c) Manufacturing expense: It includes the cost of indirect material, indirect labor, fixed expense and other expense (show in figure 5.1) in production sector, that is various costs associated with manufactured products excluding direct material and direct labor, are classified as manufacturing cost.

18

(5.6) MANAGERIAL WISDOM: UNCONSCIOUS PRICE

Mr. Chang met Lin who is fond of drinking in the street. Seeing burn mark on his both ears and cheeks, so he asked him what happened? Lin said: "I go home shortly after drinking, the phone ringing, while I mistake the iron on the table as the phone and answer! Mr. Chang asked again: "then what happen to your ear and face in your left? Lin: "Oh! After a while, the telephone rang again!

Remark

Dealing

with an issue, we must keep a cool head. If not, not only you will get half the results with twice the effort and often you will make thing from bad to worse, seriously it may cause a lifetime regret.

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a)

1.2.2 Operating expense

Selling expense: Each cost of processing customer orders and delivering the product or service to customers.
Administrative expense: Usually each administrative cost of the whole company, all are classified as administrative expense except the manufacturing cost and sales expense.

b)

1.2.3 Selling price

The total cost of the product is composed by a) Direct materials, b) Direct labor, c) Manufacturing expense, d) Administrative expense, and e) Sales expense

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THE STRUCTURE OF THE

PRODUCTION PLANT SALES PRICE
Profit ($9)
Total cost of the

Sales expenses Cost of production Administrative expenses cost ($7) Manufacturing

($76)

($8)

($83)

production ($91)

Selling price ($100)

Manufacturing
Major cost ($69)

expenses ($7)

Direct labor ($14)

Direct material ($55)

Figure 5.2. Structure Of The Production Plant

Sales Price

21

(5.7)MANAGERIAL WISDOM: SETTING PRICE

An entrepreneur hired a painter to paint a portrait for him, but refused to pay the original agreed US$ 5,000, because he said: "The painting is not me." A few years later, the painter held exhibition and exhibit the picture in public, described as "Thieves", so the entrepreneur called to protest. Painter said: "The paintings are not you; it is what you say previously!" Finally the entrepreneur bought the picture at the price of US$100, 000, and the title changed to "Philanthropists.

Remark

Calculating the company cost or setting price is much more complicated in practice than in theory
22

(1.3 )THE CATEGORY ACCORDING TO THE LEVEL OF AVERAGE

a)

Total cost: The cost not through the average approach is called the total cost. Unit cost: The cost through the average approach is called unit cost.

b)

When the handlers making investment decision, budget and quotation, the unit cost is the most important consideration to them.

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1. 4 THE CATEGORY ACCORDING TO WHETHER CHANGE BY THE TURNOVER VARIATION

a)

Fixed cost: The cost will not change by the output fluctuation in the short time, such as salary, office and factory rents, property taxes, depreciation, etc. Variable cost: The cost in direct proportion with the variation of the output, such as the cost of raw material and material.

b)

24

1.5 THE CATEGORY ACCORDING TO WHETHER PAYS CASH OR NOT

a)

Out-of-pocket cost: Refers to the cost that need the use of the current capital, such as the cost of buying raw materials, spare parts, land and updating plant and equipment. Sunk cost: It refers to the cost that used the capital in the past.

b)

25

(5.8) MANAGERIAL WISDOM: PROBABILITY OF

SUCCESS

One patient was preparing to have an operation, deeply worried and asking the doctor: Doctor, how much of the successful probability of the operation?" Doctor : "Even add this time together, I have 97 times experience of the surgery!" Patient said : "That I will not worry!" Doctors went on to say: "Ah! I hope I could succeed once.

Remark

Successful experience is good to hear or see, while continuous experience of failure would be much trembled with fright.

26

1.6 THE COST CATEGORY IN ECONOMICS

1. Production cost

2. Opportunity cost

3. Economical cost
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1.6.1

Production cost

The

production cost refers to the cost required to pay when the producer engages in production, in order to achieve a variety of production factors It is including the cost of the raw material expenses, wages, rent, interest, power expense, depreciation, insurance, all kinds of marketing expense, excise taxes, part of the taxes and etc.

1.6.2

The opportunity cost

Opportunity

cost refers to choose a certain action, but must give up other choices, and thus the loss or the potential benefits sacrificed, that is the saying of the truth: " One cannot make an omelet without breaking eggs "

" You cannot eat your cake and have it "

28

(5.9)MANAGERIAL WISDOM: THE OPPORTUNITY COST

OF
A

"WOLVES ARE COMING!

shepherd child near the village watched a flock of sheep. One day, he loudly cried Wolves are coming!" The people in the village ran out immediately after hearing the cry for help and wanted to help the shepherd child, but he laughed at them of being cheated. After a number of funny games of Wolves are coming!", one time wolves really came, so the shepherd child was very scared, he screamed in panic: " Wolves are coming! Please Come and help me! Wolves are eating the sheep." But nobody believed his cry. Therefore neither wanted to help him. He plays his own joke on reputation.
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REMARK
Good

corporate reputation is synonymous to be positive, longterm survival and growth, which cannot tolerate a trace of trickery or deception.
The

opportunity cost of shepherd child playing the game is that the sheep are eaten up by wolves, therefore, neither play the joke on the company reputation nor plays the joke on your own reputation.

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Example 5.1 The opportunity cost of picnic

Hu was a junior, in addition to attend class, and he also took on a part-time job in gas station which paid him US$80 per day according to daily work. When the school was on spring holiday, he wanted to go to beach and enjoyed himself. If he goes to the beach by asking for leave, he would lose one day income wage US$ 80, which would be the opportunity cost of this play.

Example 5.2 The opportunity cost of investment

Guan RU company are considering to purchase land for expanding plant in the future with 50 million cash, but the fund can also be deposited in the bank. If using the money to buy land, then the profit obtained by investing in the bank is the opportunity cost
31

(5.10)MANAGERIAL WISDOM: THE

OPPORTUNITY COST OF HAVING AN ADEQUATE MEAL

There was a number of outflow honey from a small crack in the food room. A flock of flies flew there to have an adequate meal. Nobody wanted to leave for the sweet honey. However, after a long time, the flies feet were firmly attached by the honey, which no longer can fly. Flies regretted and said: "We are really stupid! For the sake of momentary enjoyment, we lost our lives.

Remark
Cannot make an omelet without breaking eggs. You should consider carefully what you should pay before obtaining something.
32

Example 5.3 The opportunity cost of pursue advanced study

Mr. Wang holding a post in a company with annual salary US$60,000, at present he is considering to quit for further education, but he must give up the current work for the decision. The annual opportunity cost is giving up existing annual salary of US$60,000 income if Mr. Wang chooses further education.

33

(5.11) MANAGERIAL WISDOM: THE OPPORTUNITY

COST OF THE SESAME CAKE

A person who sold sesame cake was peddling loudly in the busy street: "Come on! Come! Hot sesame cake, do some people want it?" Just then a young man from the village past there, sitting before the venders stand, said: "Give me three sesame cakes!" The young boy ate the hot sesame cake with relish, and began to leave without preparing to pay after finishing eating. But the vendor stopped him and said: "You have not paid yet!" "What money? Where is the money, I thought it was free! "What? You dare to eat the sesame cake without money, well! I have to give you a little lesson!" After saying, he picked up a thick stick nearby and beat the young boy several sticks, and then drove him out.

34

(5.11) MANAGERIAL WISDOM CONT.

The boy escaped to the countryside by covering the head and scurrying away like a rat. Whenever the villagers came to inquire the market price about the rice and wheat, he said: I am not quite clear about the market price of rice and wheat, but I know the market price of three sesame cakes is beat six sticks."

Remark

The opportunity cost of eating three sesame cakes without money in pocket is beat six sticks in the example.
35

(5.12) MANAGERIAL WISDOM: THE FAILURE IS THE

OPPORTUNITY COST OF THE SUCCESS

A soldier asked Frederick the Great: "I follow you at the risk of life and have fought many battles. Why should I always be in the lower rank? Why cant I look like any the others fellow officers which bring prestige and honor to the families and clansmen by being promoted to a higher rank?" Frederick with a great smile on his face, pointing to a donkey that is carrying the supplies and gear of an army passing through him at that time, replied: "Do you know the donkey is also at the risk of life and has fought many battles just like you, but it is still a donkey.

Remark
If you cannot learn lessons and opportunities for growth from experience (failures), and then the "bull pulled to Beijing is still a head of cattle" (Taiwanese). Usually successful experience will make people feel at ease, but you can learn something more from the failure (opportunity cost).

36

REMARK CONT.

If they fail to become convinced some truth in your life, and then the soldier is always a soldier, grass-roots employees are always be grassroots employees. There is no chance for them bringing prestige and honor to the families and clansmen by being promoted to a higher position. Little or never does the opportunity cost appear in the company account, but the management staff must take it into consideration when making decision. Almost every feasible option has its own opportunity cost. Taking the above-mentioned example 5.3, if Mr. Wang decides to remain in office, he will still have his opportunity cost. That is he has no way to get the benefit by further education obtaining in the future. In short, every action program managers faced has its advantage and disadvantages respectively. When selecting an action program, you must give up other programs at the same time. The profit of the abandoned program becomes the opportunity cost of the selected program.

37

1.6.3 ECONOMICAL COST

It is the concept of an opportunity cost, referring companies engage in production in order to make the resource owner to provide each cost required in the specific production activities with all the resources in any form.

It is including: 1. Accounting cost:

It is also known as outlay cost, or contract cost, refers to direct and indirect cost of production resources used by the manufacture.

2. Internal cost

It is also called as non-expenditure cost which means the company engages in production due to use his own resources, while he must burden but not have money to pay.

38

ECONOMICAL COST :
a)

Accounting cost: It is also known as outlay cost, or contract cost, which refers to direct and indirect cost of production resources used by the manufacture. Internal cost: It is also called as non-expenditure cost, which means the company engages in production due to use his own resources, while he must burden but not have money to pay.

b)

39

 External

benefit

refers to the companys "no revenue contribution," to the community, such as passing through 7-ELEVEN late at night and seeing a bright light, which brings pedestrians a sense of security. Besides, an appointment meets at the Taipei 101 building, which is a highly recognizable dating target. The company pays staff salary, which brings stability to society.

40

1.7 COST CATEGORY BASED ON THE PROPERTY DURING USE AND SUBJECT DIFFERENCE

1. The property during use

2. The subject difference

41

1.7.1 THE PROPERTY DURING USE

a)

Assets: Such as machinery equipment, plants, natural

resources and intellectual property rights, etc.

b)

Cost: The product "inventory" manufactured by buying raw

materials and inputting direct labor ,first is listed as "current assets", and then transferred as "cost of goods sold" after selling.

c)

Expense: It is directly listed as expense without expenditure

of future economic benefits, regarding as the expenditure for the period.
42

(5.13) MANAGERIAL WISDOM: THE COST CONCEPT FOR

THE COMPANY WAGE

Recently after the salary and the welfare separating from each other, the growth rate of the welfare far exceeds the salary, according to research the expenditure of welfare in the United States has been the equivalent to 38% of salary in 1990.

Remark

In addition to pay staff salaries, in Taiwan most companies still need to pay for the following each benefits expense. It is consist of: Retirement reserve fund about 6% (according to the law the company require drawing 6% of the salary, and puts in the bank to set up special account) Annual leave about 8% (one-year working about 250 days, of which about average 20 days are paid vacations)

43

Remark cont.

Year-end bonus about 17% (business usually issue two months salary before the Lunar New Year) Labor and health insurance fee about 6%, Besides, there are still domestic travel allowance, and even foreign travel allowance, three festivals (Dragon Boat Festival, MidAutumn Festival, Chinese New Year) gifts and other benefits. In Taiwan, the total expenditure on welfare is often accounted for more than 40% of salary, for enterprises which is rather heavy burden. Therefore, when applying for a job, the person is paid the daily or hourly wage, which relatively loses about 40% of the welfare part. Aboriginal people in Taiwan go to urban areas for work, which are preferable to find labor work with high paid daily wage. In fact, their total annual income is far less than the employees with a monthly salary in the company, and no promotion opportunities for a lifetime as the grass-roots workers.

44

1.7.2 THE SUBJECT DIFFERENCE

a)

Cost of goods sold: By "the inventory cost at the beginning of period", plus "net amount of current purchase", minus final inventory "stock", while the rest shall be "cost of goods sold", which is the same as the previous mentioned manufacturing cost or product cost.

b)

Operating expense: Also known as managerial and administrative expense. It can also be divided into:
1. 2. 3.

Management expense Selling expense Non-operational expense

45

(5.14) MANAGERIAL WISDOM: THE DIFFERENCE

BETWEEN THE COST AND THE EXPENSE

One patient asked a dentist: "How much is to pull a tooth?" "NT$1000(US$30)!" the dentist said. "Ah! To pull a tooth, can be done within few minutes. Surprisingly it cost NT$1000. It is too expensive!" the patient said. "Of course it is! If you want to slowly pull the teeth, I will not object I can help you pull slowly until you feel satisfied!" the dentist replied.

Remark
The expense of pulling a tooth from the patient is NT$1000, because it does not have future benefits, which belongs to expense in the classification, but not be called the cost.
46

1.8 THE STANDARD COST IN THE MANAGEMENT

a)

Theoretical standard cost: It means standard cost under the best or the highest efficient. Past performance standard cost: It refers to the average cost during the past several years as the standard cost. Current attainable standard cost: It refers to at present condition the standard cost can be expected to reasonably reach to the efficient level. Normal capacity standard cost: It refers to the setting standard by covering the whole economic cycle Including an economic cycle of recovery, prosperity, recession, depression four stages.

b)

c)

d)

47

TABLE 5.1 THE APPLICATION CONDITION OF THE

STANDARD COST IN FOUR COUNTRIES
USA
Cost management The plan and control of budget 1 2

U.K Canada Japan

2 3 2 1 1 3

The decision of setting price

Formulating the financial statements

4
48

(5.15) MANAGERIAL WISDOM: LEARNING VS

TECHNOLOGICAL VALUE

One day a philosopher took a boatmans ship to cross a river. Both of them are bored and began to talk on the way. The philosopher asked the boatman: "Do you know anything about history?" The boatman replied: "I do not know." The philosopher shook his head and said: "So you lose quarter of your life." The philosophers asked the boatman again: "Do you know anything about philosophy?" The boatman replied: "I do not know." The philosopher said: So you lose another quarter of your life!" Then the philosopher asked the boatman: "Do you know anything about math?" The boatman replied: "I do not know."

49

(5.15) Managerial wisdom cont.

The philosopher shook his head again and said with a sigh: Then you lose quarter of your life again." After a while a very big storm started, and the boat was blown ups and downs. The boatman asked the philosopher in a hurry: "Do you know how to swim?" The philosopher replied: "I do not know. The boatmen had no other way and said: "It is the end! Your life is completely over!

Remark

Do not always consider yourself high. We must always keep modest, as the academic value is not necessarily better than the technical value. It varies according to time and place. Teaching at university is not necessarily better than the man in the street, human beings are born equal, and their work have their own importance or essential nature.

50

SECTION 2. CALCULATION METHOD OF THE UNIT COST

51

(5.16)MANAGERIAL WISDOM:
THE COST OF STEAK
An

American who travels to Taiwan very unhappily says to a butcher: "In the U.S., such a big steak is as high US$1". The butcher replied: "Maybe yes! But you do not count in transportation expense".

Remark

When we calculating prices, we often overlook the various factors of the product cost, and the price required, in addition to buy direct cost of the item, it also includes wages, rent, carriage expense, insurance, warehousing fee, reconditioning fee, taxes and other cost.
52

2.1 NECESSITY FOR THE UNIT COST DATA

Making decision: Unit costs are necessary data when managers formulate a number of decisions, such as setting prices. Budget: It also needs the unit cost data on the operational plan and control. Net profit: In the calculation of final stock value and full-year net profit, they need unit cost data.

53

(5.17)MANAGERIAL WISDOM: TWO-FOR-ONE OFFER

Somewhere, there was a very stubborn coffin store owner. One day, a man lost his father and came to his shop to buy a coffin, after asking the price of the coffin, he said: "It is too expensive! Can you make it a little cheaper?" However, the boss of the coffin store was born an old fogy who refused to cut the price in any case. The guest struggled with the boss for an hour, continuously asking: "Could you cut down a little?" The owner of the coffin store finally slapped the man and said impatiently: "Well! The price cannot be cut down, but I will give you the small coffin which is useful to you at some other time.

Remark

Attached gift is also a way to reduce the price. You may get the opposite effect if you do not send the customer the right thing required

54

2.2 The Category of the Unit Cost System

It

emerges the two kinds of cost system for a variety of manufacturing process, namely process costing system and job-order costing methods both of them with their own unique method to calculate the average cost respectively , provide unit cost data for the managers reference.
2.2.1
The

Process costing system

basic approach of the process costing system is to accumulate the cost of a certain project or department in a certain period, and then make the aggregate amount of the product divide the total production volume in the period in which can get the unit cost of the product. applicable to long-term production with a standardized product, such as gasoline, water supply, cement, flour, chemical and electricity companies. The common features of these industries are to continually produce a standardized product more or less the same.

55

2.2.2 Job-order costing system

Job-order costing system is applicable to the condition in each period with many different products or different production batch, such as printing, furniture manufacturing, shipbuilding, lighting fixture, ceiling fans, shoes and appliance manufacturing and other industries, are generally used such job-order cost system. Job-order costing system is also commonly used in service sector, such as hospitals, law firms, movie studios, accounting firms, advertising agencies and auto repair factory. Under the job-order costing system, it does not share the total cost with many similar products, but share with the products with small quantity and different from each other.
56

2.3 COST ANALYSIS

Cost Analysis

is one of the means to pursue a reasonable price which is usually responsible for handling by the purchasing department or its support units such as accounting, engineering, technology, research and development department.
can also request suppliers to provide cost statement to facilitate analysis.

57

(5.18)MANAGERIAL WISDOM:
THE COST ANALYSIS OF THE LIFE
A

son asked his father: "Dad! How much will the marriage cost? The father replied: "I do not know, my son! I only know that until now I am still paying!

Remark
In the calculation of the lift cost, usually opinions differ from each other. You can understand the true cost only by in-depth consideration.

58

Cost analysis should include the following items: 1. Direct and indirect material cost. 2. Direct and indirect labor cost. 3. Fixed expense, depreciation expense and outsource expense. 4. Administrative and marketing expense, taxes and levies, and profit. 5. Engineering and manufacturing method.
6.

The required tool and equipment.

59

2.4 PRODUCT LIFE CYCLE COSTING

The sum total added by the following cost: 1. Owing the product cost: Price, freight, taxation but it must subtract the residual value. 2. Fuel consumption: Such as burdening electricity expense and fuel oil expense. 3. Expenses of taxation and insurance. 4. Damage and trouble shooting. 5. Checking and maintenance. 6. The working hour of operating: The workers wage. 7. The production efficiency: The output in lift cycle. 8. Others, such as interest.
60

(5.19) MANAGERIAL WISDOM: FEAR OF BEING

LAUGHED BY THE YOUNGER GENERATION
Ouyang

Hsiuin, a very famous poet in China. in his later years, he often took out the poems made in his life to amend and correct, pondering in heart and very hard. His wife persuaded him: "Why do you work so hard? Are you still afraid of being reprimanded by the teacher? Ouyang Hsiuin said with a smile: "I am not afraid of teachers, but fear being laugh at by the subsequent junior!

Remark
Every

person should always check all their own work, revising again and again, in order to perfect. The future of life is determined now.

61

SECTION 3. BREAK-EVEN ANALYSIS

62

(5.20) MANAGERIAL WISDOM: PSYCHOLOGICAL

BALANCE ANALYSIS

Mr. Liu, Zhang and Li are neighbors. Babies were born recently in the neighbors of Mr. .Liu. Mr. Zhang asked the neighbor Mr. Liu:Is your baby a boy or a girl? Mr. Liu answered: A boy. Mr. Zhang replied immediately: Congratulations! Mr. Zhang turned to the other neighbor Mr. Li and asked: What about yours? Mr. Li said: A girl. Ah, Ah! Mr. Zhang heaved a sigh. Mr. Li said angrily: You congratulated Mr. Liu on his boy while made sound Ah for our girl. Mr. Zhang also felt embarrassed for himself .Just then a noblewoman in a sedan chair passed, an idea occurred in Mr. Zhang s mind. He said right now: Look! Four congratulations over there are uplifting one Ah Ah on the sedan chair.

63

REMARK

Well- listening psychological balance analysis

64

BREAK-EVEN ANALYSIS

Break-even Analysis, also called profit and loss balances analysis, the balance between gains and losses analysis, or two ends meet analysis makes use of turnover vendors & apos, variable cost and fixed costs, etc, to analysis under which circumstances of the quantity of production and sale, the enterprises will be in the state of break even. This is the state of Break-even.

65

3.1 MAIN FUNCTION OF BREAK-EVEN ANALYSIS

Break-even analysis show: The importance of fixed costs and variable costs, The influence of sales revenue on the profit Predicted unit selling price and the corresponding quantity of the sales, Can be referred on selling price , productive output and cost control by decision makers.

66

COMPANYS STATE OF OPERATION

A. Now b. Improving C. Worsening Sales revenue

Sales revenue

Sales revenue

Loss Loss Loss

Sales quality

Sales quality

Sales quality

67

3.2 VARIABLE COST AND FIXED COST

Cost behavior means cost varies from number of operation. When the number of operation changes, some cost may increase or decrease whereupon, but may also keep maintained. In order to provide such information, there is must to classify the cost into two categories: variable cost and fixed cost.

68

TABLE 5.4 COST BEHAVIOR

Cost
Variable cost

Total Cost
Unswayed to the number of operation

Unit Cost
Unit cost remains unchanged

Fixed cost No matter how changes in number of operation, the total cost keep the same

When the number of operation increase, unit cost decrease and vice versa.

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3.2.1 VARIABLE COST

Variable cost refers to the cost that its total cost will change in same proportion with the number of operations.

They can be measured in different ways according to the different departments of the company.

For example, production quantities, sales quantities, mileages, the number of used beds, the lines of print and the working hours.

Direct material is a good case in variable cost. The consumption of the direct materials in some periods will change in the same proportion with production quantity.

It is interesting that variable cost remains unchanged if it is expressed in terms of unit cost.
Variable costs usually includes direct materials, direct labor and other manufacturing cost, such as electric charge, materials and suppliers.
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FIGURE 5.4 VARIABLE COST

Total variable cost of batteries
NT$ 400,000 300,000 200,000

250

500

750

1000
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Automobile output

(5.21) MANAGERIAL WISDOM: COST CONCEPT

A

manager asked the president of General Motors, Roger Smith, What if the heating is not so warm. The manager thought the matter will be taken into careful consideration and the company will spend more on new heating and air conditioner. Unexpectedly, Roger Smith unfastened his coat and said You can put on a coat like me.
Remark

In order to increase profits, companies must broaden sources of income and reduce expenditure. We can increase selling price per unit and sales of quantity to broaden sources of income while decrease cost and the expenditure to cut down expense. It is not easy to redouble the sales of quantity, but most of the companies can reach the goal of reducing cost.

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3.2.2 FIXED COST

Fixed cost refers to the cost that no matter how changes the number of operation changes within the relevant range, its total cost remains unchanged. In other words, the basic difference between fixed cost and variable cost lies in the fixed will not change with the number of operation.

Total fixed cost remains unchanged despite that the number of operation increase or decrease, unless affected by outside forces such as inflation.

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FIXED COST

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3.3 THE CALCULATION OF BREAK-EVEN POINT

The break-even point can be defined as : R (Total Revenue) = C (Total Cost) including sales quantity or the amount of sales. It can also be regarded as marginal contribution equals sales quantity and the amount of sales and loans under the circumstances of fixed cost.

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BREAK-EVEN POINT
Break-even analysis can be expressed in the following forms

P : Unit selling price : Sales quantity B: Sales quantity at the break-even e : Sales quantity at certain revenue

R : Total revenue
F : fixed cost V : Unit variable cost I : Profit
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C : Total cost

BREAK-EVEN POINT

The formula of the total revenue and total cost: R = P (Total revenue = Unit selling price Sales quantity) C = F +V (Total cost= fixed cost + unit variable cost Sales quantity)

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BREAK-EVEN POINT
When at the state of break-even, total revenue equals total cost. At this time, the company makes no profit nor losses.

R (Total revenue) = C (Total cost) P B = F + V B

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BREAK-EVEN POINT
Sales quantity at the state of break-even:

Sales with certain profit (I)

Total revenue(R) (Fixed cost (F) + Total variable cost (V) ) = profit (I)

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BREAK-EVEN POINT
At the state of the break-even, the interest is zero. Thus the key to analysis the break-even point is finding out the sales that sales revenue equals the total cost of fixed cost and variable cost.

R = F + V + I

Total revenue = Fixed cost + Variable cost + profit

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(5.22)MANAGERIAL WISDOM: COST OF MAKING

JOKES

A man sitting in the bar stared at the wine for a long time. All of a sudden, a driver came, grabbed his wine and drunk off. The man burst into tears suddenly. The driver said smiling I am sorry, I just made a joke. What about if I pay your wine. What made me sad was not that wine The man said with tears. What an unlucky day it is today. I was just a bit late for work and dismissed by the boss; when I was going to drive my car, it was already stolen; I walked several miles to arrive at home and found that my wife was fooling around with the other man. When I came here to get over with myself, you grabbed that poisonous wine.

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REMARK
There are many kinds of cost. What is enterprise cost? Managers must have a deep understanding of cost. Cost is never a trifling matter. Never jokes with cost.

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EXAMPLE 5.5 THE CALCULATION OF THE BREAK-EVEN

POINT

Take the Strapex Company for example. A small-sized banding machine cost at US$2,500, and the variable cost is 1.500. The companys fixed cost is US$350,000 each month. The calculation of Strapex Company break-even point is as follows:

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RESULT :
Total revenue = Fixed cost + Variable cost + profit $2.500B =$ 350,000 + $1,500B $1,000B = $ 350,000 B = 350sets B = sales quantity at break-even $2,500 = Unit selling price $1,500 = Unit variable cost $350,000 = Fixed cost
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EXAMPLE 5.6 THE CALCULATION OF PROFIT:

Provided that Jin Song Companys fixed cost is US$3,000,000 each month; Each pottery and porcelains variable cost is US$250 and the selling price is 1,000 per box. Provided that the quantity of sales quantity goes up to 10,000 boxes in October, whats the profit?

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Result
Given information : B = 10,000 P = US$ 1,000 per unit V = US$250 per unit F = US$ 3,000.000 When we calculate in certain sales quantity, we can get the profit. The interest is as follows: I = (P V) e F = ($1,000 - $250) 10,000 - $3,000,000 = US$4,500,000
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EXAMPLE 5.7 THE CALCULATION OF BREAK-EVEN

POINT

It is the same as the example 5.6. In order to make US$5,250,000 profit, what is sales quantity of pottery and porcelain? Given information: F = US$3,000,000 V = US$ 250 per unit P = US$ 1,000 per unit I = US$5,250,000

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RESULT:

When we calculate the expected profit, the formula of the sales quantity is as follows:

At present, only sell out 11,000 boxes of pottery and porcelains can the company can get expected US$5,250,000.

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(5.23)MANAGERIAL WISDOM: ADDED VALUE

There are fake pictures in the home decoration department of SOGO department store. A duplicated world-famous picture is US$ 50 and the frame of the picture is about US$200. Consequently, the total value of the picture and the frame is US$250. However, if you take a serious look, the pictures which have already framed are worth US$500. Why? This is because of the so-called added value. A pear sold on pick-ups is just US$20; when the same ten pears are put in the gift box, it was worth US$60 in the supermarket. Remark Processing adds efficiency to the product and makes it outstand among the competitors in all details by creating the added value. That is the guarantee of our lives. If we get 50 points by offering a service or a product, with smile, the service or the product will be 100 points. The value of the added value product is squared while the non-added value one is the root of the original value.

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SECTION 4. THE MANAGEMENT TECHNIQUE OF COST DOWN

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(5.24) MANAGERIAL WISDOM: MANAGE WELL IS

BETTER THAN HEIGHTEN BUILDINGS

A new kangaroo came to the zoo and the zoo keeper kept it in grassland with one-meter fence. The next early morning, the zoo keeper found that the kangaroo was playing happily outside the fence. He immediately heightened the fence up to two meters and put the kangaroo in the fence. The third morning, the zoo keeper still found that the kangaroo outside the fence. He heightened the fence up to four meters and put the kangaroo in the fence again. The neighbors giraffe asked the kangaroo. From your view points, how high would a fence be to bar you up? The kangaroo replied, probably 5 or 10 meters high, or even 100 meters high. It is of no use as if the keeper forgets to close the fence door.

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REMARK

September 17, 2001, there was a bad flood in Taipei City. The flood swept over district of Neihu ,Xinyi, Songshan and so on. Banks of Keelung River were also affected by the flood. After the flood, 1,092 empty containers were fished out among the banks of the Keelung River near the bridge. If the containers were not be able to be bound before the heavy rain, even though deepen and broaden Keeling River, floods will still affect Taipei City and banks of Keelung River.
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4.1 CUTTING DOWN THE COST OF PURCHASING RAW MATERIALS

The cost of raw materials has been the largest expenditure for manufacturing industry. If we are successfully able to reduce the cost of purchasing raw materials, it will have a great impact on the companys interests. The reason is that:

Reducing the cost of purchasing raw materials 1, equals to adding 1 to the profit.
Reducing the cost of purchasing raw materials 1, equals to increasing sales ratio. 1 sales profit rate.
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(5.25)MANAGERIAL WISDOM: REDUCING COST BY

REPETITION USE

Son: Dad, I will save a sum of money for you. Father :How will you save that money.

Son: This semester you dont need to buy new books for me, I can reuse the last semesters books. Because I failed to go up to the next grade.

Remark
Is it really we can reduce procurement costs by repetition use. Companies do their brain to reduce cost. The one who do not try his best to reduce waste or cut down cost are considered to have no competition.

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REMARK CONT.

The author went to Honduras to give classes and lectures and once came to Honduras University of Technology.

The president Dr.Ricardo Antillon emphasize that the university had 6,000 students, but there was none full-time teacher and all of the teachers are part-time employees. The university still afforded to build high buildings and broaden school district despite the low tuition from the students. This was owing to cost control.
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4.2 REDUCING WASTE

The person, thing or expenditure that cannot produce added value, materials that are unavailable, the stock that cannot be immediately delivered, a two-page paper that only one page is use, the equipment that are left unused, relax employees are wastes for companies. They should try every means to reduce waste.

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(5.26)MANAGERIAL WISDOM:
BLESSING AND REDUCING WASTE
A girl

whose sister has passed away missed her sister very much and asked superstition for help. Soon she saw her sister eating the sour food. She was very sad and asked her sister. Why are you eating this? I have sent you spirit money.
Her

sister answered I am punished because I had wasted a lot when I was alive. I have to eat up all the food I wasted in my life.
She

still felt sad. Then she saw another four barrels of sour food and asked immediately. Does it include those four barrels? Her sister replied They are yours.
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REMARK
Nowadays

people are well-fed and well-clothed, but many people have got the bad habit of wasting resources. From a small scale, it is just waste behaviors of individuals. But when we consider that if everyone in the company from the employees to the employer, waste some inconspicuous resources, the accumulation is amazing. Reducing waste means blessing to some extent.

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4.3 LEARNING CURVE AND EXPERIENCE CURVE

4.3.1 Learning curve

The time of producing goods will decrease with the increase of practice. It presents the saying Practice makes perfect. According to studies, when there is a double in production output, the working hours can reduce 15 ~ 20%. A curve describing accumulated average figure, connected by dotted line, is the learning curve.

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LEARNING CURVE OF THE TIME OF PRODUCING TABLES

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4.3.2 EXPERIENCE CURVE

Experience curve is an experience rule. Experience curve shows the unit cost of producing one product. With the doubled accumulation of the production output, unit cost decrease by 20-30%, the unit cost do really reduce.

The more the production output is, the quicker the cost will decrease.
According to experience curve, cost disparity of the same product in different enterprises mainly lies in the disparity of production output.

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EXPERIENCE CURVE

In order to be competitive by cutting down cost through the efficiency of experience curve and the location where is good to developing economy, modern enterprises have to select a suitable place in the world to produce the standard products in large quantities. The concept of experience curve points out that the market share varies inversely with unit cost.

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THE END OF CHAPTER 5

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