L11- Costing

Key point : COSTING.

Outsourcing is just a support point to costing.
Outsourcing is one way to reduce cost (ie cost control.)


WHAT IS COST?.
resources (material, labour etc) that need to be sacrificed to achieve a business objective (eg to produce a doughnut)


Different type of costs.

- FIXED COST

when is a cost , fixed cost ?.
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It is fixed cost when it is NOT dependent on the business or volume of activity (ie output, sales etc) .
However, it is usually time based (eg rental(per month), insurance (per year)

- VARIABLE COST
- the cost is DEPENDENT on the business or volume of activity (ie output, sales etc)

- MIXED COST.
when the cost have element of fixed and variable cost.
eg : electricity used in a hair salon : fixed (for lighting/air cond), variable (electricity used for hair dryers)

Components of costs.

TOTAL COST = FIXED COST + VARIABLE COST.

Why want to learn about fixe cost, variable cost?

SO that we can used it to understand the break even quantity?

BREAK EVEN QUANTITY.

What is break even quantity formula :

BE Quantity = Total Fixed Cost /Min selling price per unit (min selling price) - variable cost per unit

Why want to know Break even quanity?
in business, we need to know how much to produce, how many to sell before we can make a profit.

BEq = the quantity one need to sell/produce to break even ie when profit = ZERO
= when all fixed costs recovered.
= produced or sell less than BEq = loss, produced or sell more than BEq = profit.

WHY BEq is important ?
at this point, we do not have to pump in capital/cash/money.


WHAT is minimum selling price?
The selling price at which profit is zero, if you sell below min selling price, loss incurred, if sell above min selling price, there is profit.


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Cost can be DIRECT or INDIRECT.

To produce one doughnut : made up of many costs - flour, oil, sugar, electricty, rental of the factory, capital cost of the mixer.

Direct cost component of a product : ie can be traced back directly to the source.
eg : flour, sugar, oil : direct cost.

Indirect cost : electricity, rental of the factory, capital cost of mixer.

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2 way to grow business :

a) expand the business - organic or inorganic (remmber)

b) control cost.

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How to reduce cost ?

One way - outsource.

To decide if should be outsource :
a) need to analyse it quantitively, based on cost and
b) qualitatively.

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Whether to outsource or not - compare the cost directly related to outsourcing the service vs cost incurred in providing the service internally. (NOTE : don't use min selling price to decide whether to outsource) - see 6P (slide 23) example on whether to outsource or not (ie $2 per unit (outsource vs $2.40 per unit if provided internally)


What are the advantages/disadvantages of outsource?.
(see 6P)

Core function should not be outsourced.