SCA

JURY ASSIGNMENT

SUBMITTED BY :-
GURNOOR KAUR
BFT/18/620
DFT-VI
LABOUR COSTING & INCENTIVE PLANS.
Labour cost or total labour cost is the total expenditure borne by employers for employing
staff.
Total labour cost consists of:

 employee compensation (including wages, salaries in cash and in kind, employers’ social

security contributions);
 vocational training costs;
 other expenditure such as recruitment costs, spending on working clothes and
employment taxes regarded as labour costs;
 minus any subsidies received.

Eurostat publishes annually the following three core indicators:

 average monthly labour cost: total labour cost per month divided by the corresponding
number of employees (including apprentices), expressed as full-time equivalents;
 average hourly labour cost: total labour cost divided by the corresponding number of
hours worked;
 structure of labour cost: wages and salaries, employers’ social security contributions
and other labour costs, expressed as a percentage of total labour cost.

Beside this annual labour cost data collection, Eurostat also publishes the detailed results of the
four-yearly Labour cost survey (LCS) and the series of the quarterly labour cost index (LCI).
The Eurostat definition closely follows the international one laid down by the International
Conference of Labour Statisticians (Geneva, 1966) in its resolution on the statistics of labour
cost.
The labour cost includes both direct and indirect costs.

 Direct costs (compensation of employees):

o gross wages and salaries paid in cash;
o direct remuneration (pay) and bonuses;
o wages and salaries in kind (company products, housing, company cars, meal
vouchers, crèches, etc.).

Direct costs are dominated by wages and salaries paid in cash.

 Indirect costs:
o employers’ actual social contributions (i.e. statutory, collectively agreed,
contractual and voluntary social security contributions);
o employers’ imputed social contributions (mostly guaranteed pay in the
event of sickness or short-time working, plus severance pay and
compensation instead of notice);
o vocational training costs;
o recruitment costs and work clothes given by the employer;
 o taxes paid by the employer (based on their wages and salaries bill or on
the numbers they employ)
o minus subsidies received by the employer (intended to refund part or all of
the cost of direct pay).

Indirect costs are dominated by employers’ actual social contributions, in particular by

employers’ statutory social security contributions.

What is Incentive Plan?

Incentive plans are methods in which employees of an organization are kept
motivated for the work that they do, and are given incentives on reaching or
accomplishing certain organization goals. The incentive plans can be for lower level
employees, middle management and senior management. It usually comprises of
incentives like profit sharing, project bonuses, stock options, sales commission etc.

Incentive plans are plans for low level employees who are at the bottom of the
organization’s hierarchy, which mostly includes staffs and first line supervisors. For
example, a software programmer might receive a performance bonus for creating a
low cost application which helps the organization in cost optimization.

The middle management incentive plan includes the work group managers. For
example, IT manager would get a performance bonus for completing all the work
projects in time and within the budget allocated to him.

Incentive plans for upper management is applicable to executive employees. For

example, a controller for maintaining very high cash flow during difficult times will
receive company stock options for such an exceptional performance.

Different types of incentive plans are:

1. Profit Sharing: It is available to full time employees. The organization provides
funds/bonuses bases on a percentage of the amount of profit before tax. The
employee receives a portion of this fund. For example, an employee receives a
salary. This might be directed to a retirement program. Unfortunately, this method
gives the poor performing employees an advantage.

2. Project Bonus: This is awarded to a team or an individual. The organization

divides the reward among its team members according to the base salary of every
employee. The organization might also reward a poor performing employee. This is a
disadvantage for other employees as well as the team.

3. Stock options: This option is normally to the upper management. An organization

might offer employee stock options to an executive employee for retaining that
particular executive. The employee has the option to purchase company stock at a
fixed price without considering the current market price of that company.
4. Sales Commission: When the company is not performing well, it is difficult to
recruit sales employee who will be ready to work strictly on sales commission. To
tackle this, the organization might offer base salary plus sales commission. The
salesperson would definitely receive a base salary which will remain fixed and
he/she will receive commission on every sale done.
 

This article has been researched & authored by the Business Concepts Team. It has
been reviewed & published by the MBA Skool Team. The content on MBA Skool has
been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management
Dictionary covers over 2000 business concepts from 6 categories.

EOQ & MOQ

In the world of ecommerce, inventory is typically a business’s greatest asset.

You want to have enough of it so that you can meet demand but not so much
that you can’t sell through it.

Purchasing inventory or raw materials isn’t always so simple. Not only do you
need to find a manufacturer that sells the right supplies at the right price but
also one that allows you to order an optimal amount of units.

Many manufacturers institute a minimum order quantity (MOQ) to get you to

commit to buying enough so they can be cost-effective in production and
make a profit. It’s why you buy a dozen eggs at once rather than a single egg
at a time.

However, your ideal unit count or reorder quantity may not match your
manufacturer’s MOQ, which is one of the joys of running an ecommerce
business.

Of course, the suppliers you work with may change over time, as will your
production runs. Your first 20,000 units may look very different from the
inventory of your 1 millionth unit — not just in terms of the physical product
itself but your cash flow, profitability, and financial health.

In this article, we’ll give an overview of minimum order quantity, take a look at
some vital factors to consider when calculating MOQ requirements, and
provide tips on how to make the most of MOQs.
What is minimum order quantity (MOQ)?
A minimum order quantity is the fewest number of units required to be
purchased at one time. In ecommerce, it’s most often used by a manufacturer
or supplier in the context of a production run, though a merchant can put
MOQs in place for different types of orders.

A couple examples:

 A manufacturer’s MOQ may be 1,000 units, meaning you can buy no

less than 1,000 units of inventory at a time.
 Similarly, a brand may have an MOQ requirement for wholesale or retail
partnerships, where they require a minimum of 50 units or $500 worth
of product to be purchased together.

How to calculate minimum order quantity in 4 steps

There is no one right MOQ amount, as many businesses have different
requirements. Of course, there is often a tradeoff between having a higher
MOQ or paying a higher price per unit. While there isn’t a go-to formula for
calculating minimum order quantity, you can use the steps below as a starting
point.

1. Determine demand
As a merchant purchasing inventory, demand forecasting takes product type,
competition, seasonality, and other factors into account in estimating how
many units you will sell. This data can help inform your next purchase
order. Inventory forecasting goes hand in hand, to match supply with demand
in this equation.

You may find the minimum order quantity wanted from the manufacturer isn’t
far off from what you’ll sell through. You’ll also want to account for your total
timeline to get the inventory ready to ship, including lead times, freight transit
times, warehouse receiving with your third-party logistics service
provider (3PL) , and other potential delays, as you may realize you need to
order inventory sooner than anticipated.

A few tips on monitoring demand especially during volatile times:

 Be in constant talks with your supplier(s).

  Make sure you have enough safety stock to manage any large
fluctuations in demand.
 Review sales forecasts weekly, if not daily, to adjust production
quantities.
2. Calculate your break-even point
If you’re trying to establish a minimum order quantity of your own, you’ll need
to know your break-even point. This may happen on the second transaction
for DTC orders, when you recover the customer acquisition cost and your
customer comes back through email marketing efforts.

For wholesale relationships, consider what the lowest per-unit dollar amount
you’re willing to charge in exchange for a higher order value. It can’t be so low
that your profit margins are next to nothing, but volume discounts are
expected if you’re not just paying for smaller quantities at a higher price.

3. Understand your holding costs

Some products are more expensive to store than others (due to size, duration
of storage, and special warehousing requirements). It’s financially beneficial
to ensure such items are not kept in your inventory for too long.

Your inventory holding cost is the true cost of storing all of your products and
something you must consider before investing too heavily in inventory.

4. Come up with your MOQ

Let’s say that you consistently have relatively high demand. Your partners
purchase 200 units per order on average, and you need to sell at least 150
units per order to be profitable.

If your partners or customers have been willing to buy 200-unit orders in the
past, you could set 200 units per orders as your minimum order quantity, or
even go down to 150.

How to make the most of minimum order quantities

MOQ terms may seem awful when you’re on the purchasing side but awesome
when you’re on the selling side. Many ecommerce businesses work with
manufacturers that have minimum order quantity requirements in place, and
some brands will be in the position of implementing their own MOQs through
wholesale partnerships or minimum spend thresholds.

No matter where you are, here are some tips on how to work with MOQs.

Incentivize a higher spend on your orders

If you’re getting into wholesale or retail, you can require MOQs for bulk buyers
to help ensure retailers pay you a minimum amount. In exchange for a
minimum spend, you may choose to offer volume discounts, where you
charge the retailer less per unit in exchange for a higher guaranteed overall
spend.

Just remember you’re trying to find long-lasting relationships with retailers —

and just because someone wants the best terms doesn’t always mean it will
be worth it.

Similarly, you can test this strategy for your direct-to-consumer orders by
requiring a minimum amount of products to be sold (e.g., 3 bottles of a
beverage each priced at $10 to ensure your order value is at least $30) to
cover customer acquisition costs and the cost of goods sold.

You can also try this with a free shipping minimum spend threshold, where
you require customers to spend a certain amount of money to qualify for free
shipping.

Eliminate slow-moving SKUs

Oftentimes, brands will have more SKUs than they should, and they’ll be stuck
paying for storage and doling out cash to fulfill MOQs for products that don’t
sell or drive revenue.

Keeping your SKU count simple and minimal helps with inventory forecasting.
The difference between 20 and 40 SKUs can be hard enough to manage, let
alone managing up to 400 SKUs. It’s easy to overestimate the use of new
colors and slight variations in products. A lot of the time for ecommerce store
experiences, having more than three options is too much to think about.
“Don’t go crazy with your SKU count. Focus on keeping a catalog small while
still being able to increase  lifetime value  and new sales. For a lot of brands, 3
SKUs make up 50% of sales. You probably don’t need hundreds of products
that aren’t driving revenue.”

Ryan Treft, Founder & Partner of Coalatree and Peejamas

Boost inventory turnover
Ordering excess inventory incentivizes you to have a higher inventory turnover
ratio, meaning there’s pressure to sell your inventory quicker because you
invested more cash upfront. This doesn’t mean only run flash sales to deplete
inventory but seek out creative ways to attract and retain customers.

If the minimum order quantity amount is too high and you haven’t proven out
your business model or product-market fit yet, it’s best to look elsewhere.
Otherwise, you’ll have spent too much money that you may not be able to
recover, while also paying for warehousing.

Find other suppliers or distributors

If your manufacturer has a higher MOQ than you’d like, you can always
attempt to negotiate with them. There’s no harm in trying! If the manufacturer
doesn’t budge and still requires an MOQ that’s too high for you, consider
working with a trading company or wholesale distributor, the middlemen who
buy in bulk from a manufacturer and resell smaller quantities to others.

Ask other questions

You’re allowed to get creative in your conversations with manufacturers and
suppliers. Try rephrasing questions or thinking outside the box:

 See if a manufacturer will let you ‘mix and match’ or order several
different products to hit an MOQ, rather than only identical units.
 Ask the manufacturer if they have leftover products from other
customers who have canceled orders and thus, don’t require them to
produce anything from scratch.
Focus on relationships
It’s possible to start with good terms from a manufacturer, but it becomes
even easier over time especially when you build a good relationship with them.

Here’s how it works:

 You sell your manufacturer your vision and get them bought in.
  Your ecommerce business keeps growing.
 Your manufacturer is happy as they keep making money alongside your
growth.
 You pay them on time and order more from them.
 Over time, they may offer better terms and be more flexible with you.
“Manufacturers want you to succeed. The last thing they want is for you to go
out of business. If you’re not going through inventory or selling it, they have no
motivation to help you. Sell the vision of your company, let them see the
potential, your creative marketing, and how you’re differentiated. If they believe
in your brand, they are not just your supplier, but a partner.”

Sam Lewkowict, Co-Founder & CEO of Black Wolf

We’re all human and want to succeed. Over everything else, remember:

 View it as a partnership and not a transactional relationship. If a

manufacturer isn’t willing to work with you, they might be the wrong
partner.
 Treat people well no matter what. Partnerships are very important
especially right now, in times of a global pandemic.

Successfully implementing minimum order quantity with ShipBob

ShipBob is a leading 3PL that fulfills DTC ecommerce orders and even
some B2B ecommerce orders for merchants. ShipBob’s software, algorithm,
and analytics work together to help you make better data-driven decisions
to optimize the supply chain.

1. Built-in inventory management

ShipBob offers powerful technology with built-in inventory management
software features including the ability to set reorder points for individual
SKUs. ShipBob also has a free analytics tool that provides advanced data
visualizations, inventory forecasting, real-time inventory counts, and more. Get
answers to questions like:

 What were my historical stock levels at any point in time in any

location?
 How many days do I have left until a SKU will be out of stock?
 By when do I need to reorder inventory for each product?
  How often is each product sold across channels?
 If I run a sale on my site, how will this affect my available inventory
levels?
 How does product demand compare to previous periods?
 How are my sales affected by different seasons and months?
 What are my best-selling items?
 Which items are not generating sales and incurring high ecommerce
warehousing fees?
 What is my average storage cost per unit?
 What is the total number of bins/shelves/pallets I’m being charged for?
 And more!
“ShipBob’s analytics dashboard has a lot of valuable reports that show our top-
selling states, order revenue and costs, units sold, sales by SKU, days of
inventory, SKU velocity, sales vs. inventory distributions showing where our
customers are and where we’re shipping from, and more.”

Andrew Hardy, COO of Nature’s Ultra

“ShipBob’s analytics tool is really cool. It helps us a lot with planning inventory
reorders, seeing when SKUs are going to run out, and we can even set up email
notifications so that we’re alerted when a SKU has less than a certain quantity
left. There is a lot of value in their technology.”

Oded Harth, CEO & Co-Founder of MDacne

2. Distributed inventory
ShipBob has a number of warehouses strategically placed across the United
States (and even some abroad). We let you distribute your inventory across
multiple warehouses to optimize order delivery times and shipping costs.
When a customer places an order, it will be picked, packaged, and shipped
from the nearest location. The reduction in shipping costs can help offset the
higher spend due to MOQ requirements in some cases.

3. Wholesale shipping capabilities

With ShipBob, online store owners can create and manage wholesale orders
entirely from one central dashboard. While ShipBob primarily specializes in
DTC fulfillment, its B2B fulfillment capabilities are expanding more over time.

Conclusion
One of the biggest barriers to starting a business is the capital required to get
up and running. A minimum order quantity may prevent some businesses
from working with a manufacturer altogether, but an MOQ can often be better
in the long run for some brands rather than buying a smaller batch of
inventory at a higher per-unit cost (when you factor in the higher average cost
over time as well as freight costs to account for the higher frequency of
reorders).

The best minimum order quantity will vary across businesses, and
determining the right benchmark requires a lot of research, thoughtful sales
planning, and luck. Finding an MOQ that works for you can help you scale your
business while keeping it profitable.
 INVENTORY COSTING. LIFO , FIFO
Inventory costing is the process of assigning value to inventory, and thus to
the cost of goods sold. Though all inventory costing involves assigning a
value to goods sold, there are a number of common costing methods,
including:
 First In First Out (FIFO)
 Last In Last Out (LIFO)
 Average Cost/weighted average
Which inventory costing method a particular business chooses to use will
be based on the specifics of the operation itself, as well as the nature of the
inventory. Below, we discuss each of these costing strategies in more
detail.

1. First in First Out (FIFO)

An operation following a First-in, First-out inventory costing methodology
operates under the assumption that the cost of inventory on-hand at any
given time should represent the the cost of the inventory that has been
most recently purchased. This means that when inventory is sold, the
oldest costs (the cost of goods for the oldest inventory) are associated to
the sale.
First-in, First-Out inventory costing is the method most-attuned to true
buying cycles, where the oldest inventory is typically the first inventory to
be sold. This is especially important for goods that expire or become out of
date quickly, such as food, pharmaceuticals, and other perishable goods.

2. Last In First Out (LIFO)

An operation following a Last-in, First-out inventory costing methodology
works in the exact opposite way from first-in, first-out. With LIFO, when a
sale is made, the most recent inventory costs are associated with that sale.
LIFO may seem like an odd method of inventory costing for many
operations, since it is not tied to the typical buying cycle. And, indeed, it is
less practical than FIFO in most cases. But there are certain types of
operations and products where LIFO makes sense: Operations where LIFO
actually does mirror the buying cycle.
An example of this might be a supplier of wood chips. In many operations
like this, wood chips are stored in large piles. It is difficult to rotate these
types of products like you might other goods. When new wood chips are
created or delivered, they are added to the top of the pile, and the older
wood chips are on the inside of the pile.
When an order is placed, workers would take wood chips from the outside
of the pile and work in. By associating the purchase with the newest
inventory costs rather than the oldest, this allows inventory costing to more
closely match the flow of inventory.

3.  Average Cost/Weighted Average

An operation using the average cost inventory costing methodology would
assign costs to inventory sold by calculating an average of all costs of
buying inventory. Each piece of inventory is then assigned this average
cost, instead of costs tied to the time of purchase or the age of product.
By its nature, to be accurate, the average cost/weighted average for the
cost of goods sold must be recalculated each time product is sold or added
to inventory. This is often done automatically by an operation’s inventory
management system.
Most of the operations using the average cost methodology sell or
distribute non-perishable goods, often in a non-sequential manner. It is
often the case in these operations that new stock is intermingled with older
stock, making it difficult to differentiate between the two.

The Bottom Line

Ultimately, the inventory costing strategy that you choose to implement in
your operation will depend on a number of key factors involving how your
operation and industry work, how inventory is handled, how orders are
processed, and the specific characteristics of your product itself.
A skilled systems integrator or warehouse design consultant, once they
understand the specifics of your operation, can help you determine which
inventory costing strategy is right for you and implement systems and
technologies that compliment this and other needs to help your operation
become as efficient as possible.

COSTING METHODS
Activity-based costing system is “a technique of cost attribution to cost units on the basis of
benefits received from indirect activities e.g. ordering, setting up, assuring quality” (CIMA, in
Rajasekaran and Lalitha, 2011, p.272). In simple terms, in activity-based costing system
overheads are assigned to specific activities with individual cost centres and cost activities
clearly identified.

The current costing system of Manac plc, absorption costing system can be explained as “a
costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products
being manufactured” (Accounting Coach, 2013, online). The main differences between the two
costing systems relate to the role of overheads in accounting system, the types of cost drivers,
and the allocations of costs.
Advantages of Activity-Based
Costing System for Manac plc
There is a set of advantages to be obtained by Manac plc from replacing its current absorption
costing system with activity-based costing system. First of all, by introducing activity-based
costing system Manac plc management would be able to eliminate a range of activities that do
not add value, consequently reducing the cost of product.

Introduction of activity-based costing also provides Manac plc financial management the
possibility of tracing the costs overheads with an increased level of accuracy and reliability. The
value of this advantage can be explained in a way that the management would be able to explore
the possibilities of reducing overhead costs to increase the levels of profit margins. Furthermore,
by adopting activity-based costing system Manac plc financial management would be able to
monitor the total life-cycles of all costs and identify and utilise the possibilities of their reduction.

Activity-based costing system can also provide an effective linkage between Manac plc corporate
strategy and decision making at an operational level. In other words, Manac plc managers would
be able to analyse cost-life cycle and make decisions regarding the cost overheads focusing on
strategic direction of the company.

It worth to be noted that activity-based costing system is associated with a high level of
integration with Six Sigma, Total Quality Management and a wide range of other programs of
continuous improvement. This advantage alone represents a weighty argument in support of
introduction of activity-based costing system by Manac plc, due to the fact that the
implementation of continuous improvement programs has become a necessary survival condition
in the modern marketplace.

Additional advantages of activity-based costing system include encouragement of continuous

improvement and control of the quality, effective facilitation of benchmarking, utilisation of unit
cost instead of the total cost to achieve enhanced level of clarity, and a high level of support for
performance management and a scorecard system.

Disadvantages of Activity-Based
Costing System for Manac plc
It is important that Manac plc fully understand a range of disadvantages associated with the
introduction of activity-based costing system. The major disadvantage relates to difficulties and
high costs associated with identification and cost estimations associated with activity pools of
Manac plc business practices.

Moreover, activity-based costing system involves more cost calculations compared to Manac plc
current absorption costing system. This requires additional amount of clerical work and other
related expenses such as using one of the most important types of resources – time.

In activity-based costing system mistakes may occur in the process cost identification in general,
and finding appropriate cost pools in particular with negative implications on the level of accuracy
of results.  Furthermore, scholars warn that “activity-based costing data can easily be
misinterpreted and must be used with care when used in making decisions” (Garrison, 2009,
p.338).
Manac plc is going to be the most vulnerable to these disadvantages during the initial period after
the introduction of activity-based costing system due to the lack of previous experience in cost
identification per activity and interpretation of relevant data.

Moreover, the definition of production process in an appropriate manner is going to represent

another challenging task for Manac plc employees due to the lack of experience, yet appropriate
definition of production process in a correct manner is one of the primary conditions for activity-
based costing system.

Adaptability can be specified as another potential disadvantage associated with the introduction
of activity-based costing system. To be more specific, the extension of product line and
introduction of new technology is going to require adjustments in accounting procedures within
activity-based costing system, and a wide range of difficulties may arise in the initial period of
adaptation.

The negative implications of this particular disadvantage is further increased taking into account
the fact that new product development and technological innovation has become a frequent
necessity in consumer electrical goods sector that Manac plc operates in.

Conclusions and
Recommendation
To summarise, as it has been discussed above, the introduction of activity-based costing by
Manac plc is associated with a set of both, advantages, as well as, disadvantages. Nevertheless,
a set of significant advantages to be obtained by adoption of activity-based costing such as
eliminating a range of activities that do not add value and possibility of tracing the costs
overheads with an increased level of accuracy and reliability oughtweight the disadvantages.
Therefore, Manac plc management is recommended to replace its current absorption costing
system with activity-based costing system.

At the same time it is critically important for Manac plc management to adopt a proactive
approach in terms of addressing the disadvantages of activity-based costing system once the
system is introduced. This can be achieved through providing training and development for
finance and accounts departments employees to engage in cost identification and data
interpretation in an appropriate manner.

STANDARD COSTING AND VARIANCE.

A standard cost variance is the difference between a standard cost and an actual cost. This
variance is used to monitor the costs incurred by a business, with management taking action
when a material negative variance is incurred. The standard from which the variance is
calculated may be derived in several ways. For example:

 The standard cost of a component is based on the expected purchasing volume under
a specific contract with a supplier.
  The standard cost of labor is based on a time and motion study, adjusted for down
time.

 The standard cost to operate a machine is based on expected capacity levels, utility
costs, and scheduled maintenance charges.

A standard cost variance can be unusable if the standard baseline is not valid. For example, a
purchasing manager may negotiate a high standard cost for a key component, which is easy
to match. Or, an engineering team assumes too high a production volume when calculating
direct labor costs, so that the actual labor cost is much higher than the standard cost. Thus, it
is essential to understand how standard costs are derived before relying upon the variances
that are calculated from them.

Types of Standard Cost Variances

There are many types of standard cost variances, including the following:

 Fixed overhead spending variance

 Labor rate variance

 Purchase price variance

 Variable overhead spending variance