P3 – CHAPTER 8
PRODUCTIONAL COSTS
CONTROL & MANAGEMENT
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8.1 Introduction
1. The essential elements in control system:
1. The detailed operational planning;
2. The actual results in operation;
3. The comparing the actual results and planning;
4. The official rules to change the operations if neccessary.
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8.1 Introduction
1. The essential elements in control system:
1. The detailed operational planning;
a. The policies and rules:
+ The official documents should be published for guidance;
+ The internal using manual for quality and operational
issues;
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8.1 Introduction
1. The essential elements in control system:
1. The detailed operational planning;
b. The longterm planning (over 5 years):
+ Cover all functions such as: marketing and sales;
production, personnel, and finance;
+ Developed based on top managers’ decisions and
companies’ policies;
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8.1 Introduction
1. The essential elements in control system:
1. The detailed operational planning;
c. The mid & shortterm planning (within 1 year):
+ Developed in certain periods for operations, based on
midle managers’ decisions (production manager);
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8.1 Introduction
1. The essential elements in control system:
2. The realistic performance;
+ The realistic performance should be updated & compared
with operational planning in the same parameters;
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8.1 Introduction
1. The essential elements in control system:
3. The comparation and evaluation;
+ Comparing the updated performance with operational
planning, evaluating the feasibility of remaining plan;
+ Based on the trend of updated performance, preparing for
adjusting the remaining plan;
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8.1 Introduction
1. The essential elements in control system:
4. The adjusting: revise or update the remain plan
+ Updating the remain plan, to meet original targets and
budget of operational planning;
+ Revising the remain plan to be feasibily to meet the
targets;
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8.1 Introduction
1. The essential elements in control system:
+ The requirements of control process:
- Simplicity, effectiveness; flexibility;
- Correct and updating information/data;
- Should Be focused on specific factors/parameters;
- Should be planned and adjusted;
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8.1 Introduction
2. The production and labour control:
a. The advantages and neccessaries of control process;
b. The implementing of control process in the system;
c. The staffs trainning for operations;
d. The evualuation results with relevant compensation, and
remuneration
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8.1 Introduction
2. The production and labour control:
a. The advantages and neccessaries of control process;
- Confirming that control process is necessary!
- Reminding and determining the responsibility people in
control process,
- Difficult to convince the leaders changing/updating
control process if the system still gets benefit.
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8.1 Introduction
2. The production and labour control:
b. The implementing of control process in the system;
- Co-operating all staffs is the key to succeed control
process.
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8.1 Introduction
2. The production and labour control:
c. The staffs trainning for operations;
- Trainning programs are very important to implement
control process.
- Trainning programs should be maintenced.
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8.1 Introduction
2. The production and labour control:
d. The evualuation results with relevant compensation, and
remuneration
- The evaluating results and compensation for control
staffs should be reminded (in short to long-terms);
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8.1 Introduction
2. The production and labour control:
d. The unsuccessful causes in control process
- The operators: under qualified, mistakes in operations,
- Operations data: input data (costs, standard time,
auditing data,…) are not correct.
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8.2 Operational cost computing
Operational unit cost determination
a. Materials and direct labour: based on bill of materials
(BOM) and involved workers.
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8.2 Operational cost computing
b. Overhead costs for each item: overhead costs based on all
kinds of item, then it should be allocated to each kind of
item. The consideration factors for Overhead costs
allocation as follows:
- Number of involed staffs,
- Involved labour cost,
- Involved working hours,
- Raw materials for each item,
- Number of machine hours....
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8.2 Operational cost computing
Example: A certain factory produces 2 types of item, the
allocation overhead cost is based on involved working hours.
This month, the O. cost is $ 20,000, the required working
hours for product A is 400 hours, and product B is 600 hours,
determine the allocation overhead cost for each kind of item:
Product A: (400/1,000) x $20,000 = $8,000
Product B: (600/1,000) x $20,000 = $12,000
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8.3 The simple method computing unit cost
1. The weighted method:
This method is useful for items in the same group, that are
compared amomg them to determine the weighted for each
item, based on experiences or benefit contribution.
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8.3 The simple method computing unit cost
1. The weighted method
Example: A certain factory produces 4 kinds of item: A, B,
C, and D. The total costs (materials, labour,…) are used for
all items. At the end of period, the report of total costs is
28,980,000 VNĐ. And total output volume as follows:
- item A: 2,000 units
- item B: 1,500 units
- item C: 1,000 units
- item D: 2,000 units
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8.3 The simple method computing unit cost
1. The weighted method
The confirmed weighted such as: (equivalent exchange):
item A = 1.0;
item B = 1.2;
item C = 1.5;
item D = 0.8;
Calculate the selling price for all items?
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8.3 The simple method computing unit cost
1. The weighted method
Solution: consider item A (weighted is 1.0) as a standard
item for equivalent exchanging all items B, C and D to
standard items.
- item A: 2,000 x 1.0 = 2,000 units
- item B: 1,500 x 1.2 = 1,800 units
- item C: 1,000 x 1.5 = 1,500 units
- item D: 2,000 x 0.8 = 1,600 units
Total 6,900 units
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8.3 The simple method computing unit cost
1. The weighted method
Selling price for unit of standard item (item A):
28,980,000 / 6,900 = 4,200 VNĐ.
item B: 4,200 x 1,2 = 5,040 VNĐ.
item C: 4,200 x 1,5 = 6,300 VNĐ.
item D: 4,200 x 0,8 = 3,360 VNĐ.
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8.3 The simple method computing unit cost
1. The weighted method
Total selling price as follow:
- item A: 4,200 x 2,000 = 8,400,000 VNĐ.
- item B: 5,040 x 1,500 = 7,560,000 VNĐ.
- item C: 6,300 x 1,000 = 6,300,000 VNĐ.
- item D: 3,360 x 2,000 = 6,720,000 VNĐ.
Total: 28,980,000 VNĐ.
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8.3 The simple method computing unit cost
2. The ratio method
- Necessary for items without the same group (can not
determime weighted),
- Based on the planning costs and the actual costs, to
determine the ratio to compute actual selling price for each
item.
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8.3 The simple method computing unit cost
2. The ratio method
Example: A certain factory produces 3 kinds of item A, B,
and C, planning selling price for each item as follow:
- item A: 2,250 VNĐ/unit
- item B: 4,500 VNĐ/unit
- item C: 1,500 VNĐ/unit
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8.3 The simple method computing unit cost
2. The ratio method
In this certain period the total actual costs to produce all
items is 8,640,000 VNĐ and the total output as follow:
- item A: 1,200 units
- item B: 900 units
- item C: 1,500 units
Computing the actual selling price for each item.
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8.3 The simple method computing unit cost
2. The ratio method
Solution: Total planning prices:
Item A: 2,250 x 1,200 = 2,700,000 VNĐ.
Item B: 4,500 x 900 = 4,050,000 VNĐ.
Item C: 1,500 x 1,500 = 2,250,000 VNĐ.
Total: 9,000,000 VNĐ.
The ratio is determined such as: (actual vs planning)
8,640,000 / 9,000,000 x 100% = 96%
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8.3 The simple method computing unit cost
2. The ratio method
The actual selling price for each unit:
item A: 2,250 x 96% = 2,160 VNĐ.
item B: 4,500 x 96% = 4,320 VNĐ.
item C: 1,500 x 96% = 1,440 VNĐ.
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8.3 The simple method computing unit cost
2. The ratio method
Total selling price for each kind of item
Item A: 2,160 x 1,200 = 2,592,000 VNĐ.
Item B: 4,320 x 900 = 3,888,000 VNĐ.
Item C: 1,440 x 1,500 = 2,160,000 VNĐ.
Total: 8,640,000 VNĐ.
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8.4 Work-in-process cost computing
Total operational costs include WIP costs and item costs,
then it should be fairly allocated.
If the costs for WIP is reduced, then the selling prices for
items is increased, the benefit is low.
If the costs for WIP is increased, then the selling prices for
items is decreased, the benefit is high.
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8.4 Work-in-process cost computing
1. Materials cost consideration
Based on materials that used to making this WIP.
All other costs (labour cost, overhead cost) are allocated to
items.
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8.4 Work-in-process cost computing
Example: in a certain period, the total costs to produce item
A is 7,400,000 VNĐ, includes:
Material cost: 5,000,000 VNĐ
Labour cost: 1,600,000 VNĐ
Overhead cost: 800,000 VNĐ
The end of this period, the operational report is that the
factory produced 1,600 items and 400 WIP.
Computing the value of WIP and value of items
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8.4 Work-in-process cost computing
Solution
Materials cost for each unit (item + WIP)
5, 000, 000
2,500 VND
(1, 600 400)
Total value of WIP: 2,500x400=1,000,000 VNĐ
Total value of items:
7,400,000 – 1,000,000 = 6,400,000 VNĐ
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8.4 Work-in-process cost computing
Solution:
Selling price of item:
6, 400, 000
4, 000 VND
1, 600
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8.4 Work-in-process cost computing
2. Percentage of completion consideration:
The end of opertional period, determine total WIP and
confirm the percatage of completion (compare with final
items);
Tranfer WIP to final items for allocating overhead and
labour costs. (but Materials is fullly allcated, 100% for WIP)
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8.4 Work-in-process cost computing
Example 1: In 1/2015, a certain factory produced the items
A, and actual operational cost 10,600,000 VNĐ includes:
Materials cost: 6,400,000 VNĐ
Labour cost: 2,800,000 VNĐ
Overhead cost: 1,400,000 VNĐ
The end of period, the total output 1,200 items and 400 WIP
with percentage of completion is 50%. Computing value of
WIP and the value of items
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8.4 Work-in-process cost computing
Solution:
Materials cost for each unit (item + WIP)
6, 400, 000
4, 000 VND
(1, 200 400)
Tranfer 400 WIP (completion rate 50%) to final items:
400 units x 50% = 200 units
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8.4 Work-in-process cost computing
Solution:
Labour cost for each unit:
2,800, 000
2, 000 VND
(1, 200 200)
Overhead cost for each item:
1, 400, 000
1, 000 VND
(1, 200 200)
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8.4 Work-in-process cost computing
Solution:
The actual selling price for each item:
4,000 VNĐ + 2,000 VNĐ + 1,000 VNĐ = 7,000 VNĐ.
Total value of items:
7,000 VNĐ x 1,200 units= 8,400,000 VNĐ.
Total value of WIP:
10,600,000 VNĐ – 8,400,000 VNĐ = 2,200,000 VNĐ.
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8.4 Work-in-process cost computing
Solution
Or computing based on WIP:
Materials cost: 4,000 VNĐ.
Labour cost: 2,000 x 50% = 1,000 VNĐ.
Overhead cost: 1,000 x 50% = 500 VNĐ.
Total: 5,500 VNĐ.
Total value of WIP: 5,500 VNĐx400units = 2,200,000 VNĐ
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8.4 Work-in-process cost computing
Example 2: Suppose that in 2/2015, this factory have the
actual operational cost 11,245,000 VNĐ, includes:
Materials cost: 7,000,000 VNĐ
Labour cost: 2,915,000 VNĐ
Overhead cost: 1,330,000 VNĐ
The end of 2/2015 the output report includes 1,500 items
and 500 WIP with completion rate 40%. Computing the
value of WIP and selling price for 2/2015. Comparing the
selling price between 1 and 2/2015.
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8.4 Work-in-process cost computing
Solution:
Total begining value of WIP at 2/2015 is 2,200,000 VNĐ
(from 1/2015)
Includes:
Materials cost: 4,000 VNĐ x 400 = 1,600,000 VNĐ
Labour cost: 1,000 VNĐ x 400 = 400,000 VNĐ
Overhead cost: 500 VNĐ x 400 = 200,000 VNĐ
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8.4 Work-in-process cost computing
Solution:
Materials cost uses in 2/2015 for each unit (item + WIP)
1, 600, 000 7, 000, 000
4,300 VND
(1,500 500)
Tranfer 500 WIP (C. rate 40%) to items
500 units x 40% = 200 units
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8.4 Work-in-process cost computing
Solution:
Labour cost for each item:
400, 000 2,915, 000
1,950 VND
(1,500 200)
Overhead cost for each item :
200, 000 1,330, 000
900 VND
(1,500 200)
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8.4 Work-in-process cost computing
Solution:
The actual price for each item:
4,300 VNĐ + 1,950 VNĐ + 900 VNĐ = 7,150 VNĐ.
Total value of item:
7,150 VNĐ x 1,500 units = 10,725,000 VNĐ.
Total value of WIP:
(2,200 + 11,245 – 10,725) x 103 = 2,720,000 VNĐ
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8.4 Work-in-process cost computing
Solution:
Or computing based on WIP:
Materials cost: 4,300 VNĐ.
Overhead cost: 1,950 x 40% = 780 VNĐ.
Overhead cost: 900 x 40% = 360 VNĐ.
5,440 VNĐ.
Total WIP: 5,440 VNĐ x 500 units = 2,720,000 VNĐ.
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8.4 Work-in-process cost computing
Solution:
Selling price comparing 1, 2/2015
Costs 1/2015 2/2015 difference
Materials 4,000 4,300 + 300
Labour 2,000 1,950 - 50
Overhead 1,000 900 - 100
Total 7,000 7,150 + 150
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8.4 Work-in-process cost computing
3. Actual processes consideration to compute WIP
Based on the actual cost for certain stage in production
process, we compute the value of WIP for each stage, and
the total costs of final items is the differnce between total
actual cost and total value of WIP.
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8.4 Work-in-process cost computing
Example:
A certain factory produces item A which includes 3 stages
process. And the estimated cost for each stage for each unit
as follow:
Stage 1:
Materials cost 3,750 VNĐ
Other costs 750 VNĐ
Total cost for stage 1 4,500 VNĐ
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8.4 Work-in-process cost computing
Stage 2:
Tranfer cost from stage 1 4,500 VNĐ
Others cost in stage 2 900 VNĐ
Total costs for stage 2 5,400 VNĐ
Stage 3:
Tranfer cost from stage 2 5,400 VNĐ
Others cost in stage 3 900 VNĐ
Total costs for stage 3 6,300 VNĐ
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8.4 Work-in-process cost computing
In this operational period, the total actual costs (materials,
labour and Overhead) is 7,935,000 VNĐ, and the
operational report as follow:
900 items, and:
100 WIP in stage 1
150 WIP in stage 2
200 WIP in stage 3
Computing the total value of WIP and items
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8.4 Work-in-process cost computing
100 WIP in stage 1 includes materials cost only
3,750 VNĐ x 100 units = 375,000 VNĐ.
150 WIP in stage 2 includes transfer total cost from stage 1:
4,500 VNĐ x 150 units = 675,000 VNĐ
200 WIP in stage 3 includes transfer total cost from stage 2:
5,400 VNĐ x 200 units = 1,080,000 VNĐ.
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8.4 Work-in-process cost computing
Total value of WIP:
375,000VNĐ+675,000VNĐ+1,080,000VNĐ = 2,130,000 VNĐ
Total value of items:
7,935,000 VNĐ– 2,130,000 VNĐ= 5,805,000 VNĐ.
The actual selling price for each item:
5,805,000 VNĐ : 900 units = 6,450 VNĐ.
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