Critical Costs EBook

THE BUSINESS BUILDER SERIES

CRITICALCOSTS 15 costs to manage and master, for a successful meat processing business

www.cbsfoodtech.com.au

CBS Foodtech

CBS Foodtech Managing Director, Horst Shurger

C

BS Foodtech has built

With 30 years’ in the industry, we

its’ reputation as a

have become a preferred business

supplier of innovative

partner for meat processing

European machinery and food

businesses of all sizes, proving time

ingredients that are designed

and time again that we can support

and created specifically for the

our customers through all phases

meat processing industry.

of their business growth.

We specialise in products for red meat, small goods and poultry, convenience foods, and ready meals, by supplying the highest quality products to our customers. This promise is backed by our service and experience in maintaining the highest level of quality through the supply chain.

Copyright © 2016 – All rights reserved – CBS Foodtech ALL RIGHTS RESERVED. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage retrieval system, without prior permission in writing from the authors. The steps, facts, tips and potential strategies outlined in the book may not work for everyone. Due diligence and thorough research is recommended.

W

ith an increase of acquisition of meat processing businesses and a rise of new start-ups entering the market. If you are currently planning to enter into, expand or build your business,

or if you want to make your existing business model more profitable, the Critical Costs guide may assist you!

Whether you are a supervisor, manager or business owner, it is imperative that you understand the nature and behaviour of every cost that is associated with your business.

It is therefore essential that you capture these costs and analyse them on a regular basis; once you do this your decision-making will be informed rather than ad-hoc.

In turn, Informed decisions you will lead you to experience real business transformation where you will

“

The annualised industry

notice significant improvements in

growth of 9% since 2011 along

productivity, setting and achieving

with the low level of capital

KPIs (key performance indicators) but most importantly you will start to feel in control, with full visibility that will allow you to grow the business to the next level.

HOW TO USE THIS EBOOK

intensity gives business owners healthy margins for success and financial growth.

Most importantly, knowing and managing your costs will safeguard and future-proof

�

The Critical Costs guide from the

your business.

CBS Foodtech Business Builder Series, offers an informative snapshot that highlights essential operative business costs. Learning about the

HORST SHURGER

Managing Director, CBS Foodtech

function and purpose of these costs and mastering their performance and analytics on a daily basis will help you become proactive and profitable.

CBS Foodtech is committed to helping you and your business grow.

If queries arise from the content of this publication, we encourage you to get in touch and speak with our experts. www.cbsfoodtech.com.au Thank you for connecting with us, and we look forward to being of service to you and your company.

CHRIS GREEN General Manager, CBS Foodtech

KNOW YOUR COSTS Empower yourself and your business with the knowledge and understanding of these costs, and become proactive with their continuous monitoring and analysis. Let’s start with some basic costs.

1

A relevant cost is a future cash flow cost arising as a

direct consequence of a decision

D IRECT COST A direct cost is one that is directly traceable to a

that is being costed. An example of this could be direct materials or labour in making your product.

INDIRECT COST This is a cost that cannot be directly traced to a

product, service, or department.

Examples of these types of costs are supervisors’ wages, cleaning materials, rent or insurance for a factory; these costs are also generally called overhead costs.

5

DIFFERENTIAL COST This is the difference in total cost between two

alternatives, so for example if the

and should be based on relevant

decision to produce product A costs

future costs.

$500 and to produce product B

Generally speaking, a decision is

product or service, or department

2

3

RELEVANT COST

about the future and it cannot alter what has already been done. Costs that have been incurred in the past are irrelevant to a decision that is to be made in the present and these costs are the considered to be past or sunk costs.

4

AVOIDABLE COST This cost would not be incurred if the activity to

which it relates did not exist. An example of this would be to decide whether or not to discontinue a product. The only costs that would be saved would be the avoidable costs, which are likely to be the variable and associated with the product, such as raw materials.

The costs that would be incurred whether or not the product is discontinued, are known as unavoidable costs.

costs $580 then the differential cost is $80. When managers are faced with having to choose a solution, knowing this cost will help in making decisions that are viable for the business both in the short term and long term.

6

OPPORTUNITY COST An opportunity cost is the value of a benefit sacrificed

when one course of action is taken over an alternative action. Let’s assume there are three alternative courses of action that could be taken but only one of which can be taken; the net profit from each would be $600, $400 and $800 respectively. Since only one action can be taken, the project yielding the $800 net profit would be the preferred option. The opportunity cost would be $600 as it is the next best alternative that could be taken.

7

FIXED COSTS Fixed costs are just that, they are fixed over the short

and medium term. These are costs such as your factory rent, and do not change in the short to medium term regardless of what happens in your business - or at least up to a predetermined point in time. If you are producing 500 widgets per week in your factory and your rent is $500 per week, and suddenly the following week you only produce 300 widgets, your rent is still $500. Similarly if you produce 700 widgets the following week your rent is still only $500. This is therefore a fixed cost regardless of your activity, or at least up to a point.

As you can see, the fixed cost line is unaltered by changes in volume within a certain range. Ideally your strategies should aim for an increase in volume in comparison to your fixed costs.

8

VARIABLE COSTS These are costs that vary over time and are relative to

the activity of the business; these can be costs such as labour or energy costs. For example if you have staff working on a casual basis and one week they work 20 hours, and the following week they work 40 hours then you have a variable cost, in conjunction with this if you therefore had your electricity on for twice as long to accommodate the extra hours then your electricity bill would go up, another variable cost. Variable costs can be linked to activity levels such as this; as we produce more widgets we end up with increased variable costs.

When volume increases variable costs increase as well.

9

SEMI FIXED VARIABLE COSTS A semi-fixed / variable cost

contains both fixed and variable components and so is partially affected by changes in the level of activity. An example of this would be electricity where there is a fixed charge plus a charge for each unit of electricity used, or a salesmans’ salary, which consists of a monthly salary and commission relative to the number of sales made.

You will see that an element of this cost remains fixed while there is also a variable component, which changes as activity levels change.

10

STEP COSTS A step cost is fixed in nature but only

within certain levels of activity, for example the depreciation on a machine is normally at a fixed rate, however if output levels rise and a second machine is purchased then depreciation costs will rise.

Similarly if output levels rise considerably and a second factory is rented then rental costs will increase as well.

Costs are fixed within a certain activity level; they then start to rise when this level has been passed.

11

SUNK COST A sunk cost is a past cost, which

is not directly relevant for decision-making.

A sunk cost has already been ‘spent’, as we saw in relevant costs previously; once these costs have been charged they become irrelevant for any future decision-making.

12

OVERHEADS

REDUCE YOUR COST/KG, PRODUCE HIGHER YIELDS

Overheads are

WITH INNOVATIVE GERMAN TECHNOLOGY

generally the running

costs of your business. These

The divider is a fast machine

are normally indirect product

that is capable of up to 660

costs such as rent, energy,

cuts / minute giving good

administration, marketing and other

throughput volumes.

operating costs.

Overheads can also be split into fixed and variable overheads, as we saw before rent for example would normally be treated as a fixed overhead cost, whereas marketing may be a variable overhead cost as it may fluctuate with marketing and promotional activity.

The biggest overhead looked at in the meat industry is cost/kg.

This is the total overhead cost divided by the number of Kg of product that is processed.

So if the factory produces

The RVF 911 is a Rex filling machine with high throughput rate filling capacity of up to 11,000kg / hr.

10,000kg in a week, and the overhead is $20,000 per week then it is said that the overhead has cost $2/kg.

This is where over and under absorption takes place. The overhead absorption rate is calculated like so: estimated non manufacturing

The precise FALCON HYBRID offers a continuously running in-feed-belt supported by an automatic product gripper.

overheads / estimated manufacturing costs = a rate per kg or unit of measure you are using.

If less production overhead has been absorbed than has been spent then there is said to be under absorption of overhead, similarly if more overhead had been absorbed than had been spent then it would be over absorbed.

Book a demonstration at our testing facility www.cbsfoodtech.com.au

13

ABSORPTION COSTING Absorption costing

15

CONTRIBUTION Contribution is the difference between

occurs when the factory overhead

sales value and the marginal cost

costs are absorbed into individual

of sales. In essence when we talk

products that the company makes.

about contribution we are normally

For example in our widget factory

talking about contribution towards

in the first week 500 widgets were

fixed overheads and profit.

made and the factory overhead was $10,000.

If a products sales price is set at $20 and this consists of $10 of

The overhead per widget was $20;

variable costs such as labour and

this normally gets added on to the

materials, $5 fixed costs and $5

product cost to arrive at a sales

profit, then any sale made of this

price. Normally in the budgeting

product over $10 will be making a

process we start with estimated

contribution towards fixed costs /

production volumes to arrive to

overhead and profit.

the absorption rate. This may be per unit produced, per kilogram

OVER/UNDER

produced, per service hour worked

ABSORPTION OF

or whatever fits with what the

OVERHEADS

company is producing.

Having a handle on your costs and

14

MARGINAL

the relationship each have on each

COSTING AND

other is imperative if you are aiming

MARGINAL COST

to build a successful business, but this is strategic activity alone is

Marginal costing treats overheads

not adequate; you need to have

as a period cost; basically the

an effective way of monitoring

overheads are not absorbed into

these costs ideally against your

products, they are considered a

budgeted costs for the period, on a

deduction cost for the period,

continuous basis.

which is is an alternative approach to absorption costing.

Marginal Cost is the cost of a unit of a product or service, which would be avoided if the unit were not produced. These usually consist of items such as direct labour, materials and variable production overheads.

DEVELOPING RESPONSIBILITY CENTRES COST CENTRE

✔

A cost centre acts as a collecting place for certain costs, these may either be departments within a business, or may be a division of a company.

Employees in charge of cost centres are only responsible for costs incurred in that area; they will generally control a budget of costs and will be measured on their

IT’S TIME TO THRIVE

ability to keep those costs under

AND PROSPER

control and in budget.

CBS Foodtech provides

PROFIT CENTRE

✔

unparalleled solutions to food manufacturers of all sizes. We

A profit centre is similar to a

have the knowledge, expertise

cost centre but is responsible

and innovative vision to help

for both costs and revenues in

your business in performing as

the department or division.

efficiently as possible.

Profit centre managers will normally be responsible for how revenue is generated and how

• Tailored training

costs are incurred.

REVENUE CENTRE

✔

This is similar to a cost and revenue centre but is accountable only for revenues earned.

WE OFFER YOU • B usiness case and capital expenditure appraisals • KPI measurement programs • Factory operations analysis, and cost reduction programs

CLICK HERE TO BOOK YOUR CONSULTATION ONLINE

CBS Foodtech Address: 2/7 Jubilee Ave, Warriewood NSW 2102 Phone: (02) 9979 6722 www.cbsfoodtech.com.au #cbsfoodtech