It is important to monitor the performance of cost, profit and
investment centres.
Performance measures for cost centres include:
• Cost compared to budget • Cost/unit • Efficiency, capacity utilisation, and production volume ratios
Cost per unit
Cost for producing one unit.
Cost per unit = Total costs / number of units produced
Efficiency ratio
Compares the budgeted output produced in standard hours
and actual hours worked.
Efficiency ratio =Standard hours of actual production x100
Actual hours worked Capacity utilization ratio
Measures if planned utilization as been reached.
Capacity utilization ratio = Actual hours worked x100
Budgeted hours
Production volume ratio
Compares standard hours worked with budgeted hours.
Production v. ratio=Standard hours of actual production x100
Budgeted hours
Net profit margin
Measures the profit margin after all expenses are considered.
Net profit margin = Profit x 100
Sales
Gross profit margin
Measures the gross profit margin
Gross profit margin - Gross profit x 100
Sales Cost/Sales ratios
If targets are not met, further ratios may be used.
Prodution costs ratio = Production cost of sales x 100
Sales
Material costs ratio= Material costs x 100
Sales
Labour costs ratio = Labour costs x100
Sales
Production overheads ratio= Production overheads x 100
Sales
Performance managment for investment centres
Return on capital employed/Return on investment shows
how much profit has been made in relation to the amount of resources invested.
ROCE/ROI = Profit x 100
Capital employed
Residual income mesures the profit of an investment centre
after deducting a notional charhe or imputed interest cost.
Residual income = Profit x 100
Capital employed Assets turnover assesses how effectively an organisation’s assets are being used to generate sales revenue.
Assets turnover = Sales revenue
Capital employed
This is not a percentage.
Inventory management
Inventory is the value of the goods that a business holds at a
point of time for sale to its customers.
Free inventory calculates the inventory not scheculed for
used.
Free inventory = Inventory on hand + inventory ordered -
inventory scheduled for use.
Inventory may be finished goods, work in progress or raw
materials.
In order to calculate finished goods we should produce the
formula is:
Units expected to be sold + Units required in closing inventory
- Units in opening inventory. When from time to time managers decide that it is time to reorder items for inventory they will also have to decide quantities.
The business must produce enough to cover its sales
volume and to leave enough in closing inventory.
Units produced = units sold + units in closing inventory -
units in opening inventory
The labour cost is often a large element of the cost of a
product and the remuneration methods and productivity of the workforce can significantly affect the unit cost of a product. Labour cost can be direct costs or indirect cost.
In order to calculate th direct labour costs the total number of
active hours worked must be known.
(Basic hours+overtime-IDLE) x hourly rate
In order to calculate indirect labour we must:
Calculate the overtime premium which is the difference
between overtime pay & basic rate:
Overtime premium = Overtime pay - Basic rate
Multiply by the number of hours worked:
Overtime premium x hours worked = Total(1)
Next step is to calculate IDLE time:
IDLE x Basic rate = Total (2)
And then, calculate the basic wage of the indirect workers:
Worked hours x basic rate = Total (3)
Next, calculate the overtimepay for indirect workers:
Overtime x Overtime pay = Total (4)
Total indirect labour costs=Total(1)+Total(2)+Total(3)+Total
4.
Overheads Made up of indirect materials,indirect labour & indirect expenses.Under absorption costing principles, production overheads of a business are absorbed into the cost of each of the products. The overheads absorption rate is:
OAR= Budgeted overheads / budgeted Level of activity
