Cost Ratios for Operations

USA Discussion in 'General Accountancy Discussion' started by JR., Mar 9, 2018.

  1. JR.

    JR.

    Joined:
    Oct 2, 2017
    Messages:
    21
    Likes Received:
    1
    I am trying to allocate a cost metric between material and conversion costs, then between fixed/variable/direct. Ultimately, I would like to take the fixed and variable portions and balance across expense types.

    What is a standard split? Does it depend on industry?

    My initial thought was to take our best month and use those percentages as a baseline. In the end, I want to be able to analyze month-end results and see which costs are increasing
     
    JR., Mar 9, 2018
    #1
    1. Advertisements

  2. JR.

    Drmdcpa VIP Member

    Joined:
    Aug 2, 2017
    Messages:
    423
    Likes Received:
    30
    30/30/30/10 is average cost structure but it does fluctuate quite a bit depending on size of company, and the industry and products.
    Even geographic location can impact them.
     
    Drmdcpa, Mar 10, 2018
    #2
    1. Advertisements

  3. JR.

    JR.

    Joined:
    Oct 2, 2017
    Messages:
    21
    Likes Received:
    1
    What’s buckets does your split go across ?

    30 direct 30 fixed 30 variable 10 material?

    Headcount is lean: labor efficiency is ~80%
    Volume efficiency is minimal; fixed cost are covered with constant volume
    Biggest challenge currently is supplies, maintenance, and utilities.

    With that, I want to draw the baseline now, so I can begin to measure headwinds coming our way. I’m fairly new to the company.
     
    JR., Mar 10, 2018
    #3
  4. JR.

    Drmdcpa VIP Member

    Joined:
    Aug 2, 2017
    Messages:
    423
    Likes Received:
    30
    60% dc (30% dl; 30% dm) 30% oh or fc 10% ni.

    Some industries are different. Service industries do not have direct materials, but direct labor and more overhead make up for it.

    Certain geographic locations labor is less expensive than capital. This could affect the ratios especially if the industry must be local and is either labor or capital intensive.

    With smaller business their is less overhead and labor often due to personal assets and non compensated time from owners. But as they grow they need more labor and overhead. Thus moving closer to 30/30/30/10.

    Most small businesses should be more like 30 dm, 30 dl, 15 oh, 25 ni.

    The market will dictate the costs of quality materials and labor. In this realm larger business have the edge since their costs are smaller per unit due to larger economic ordering quantities.
     
    Drmdcpa, Mar 10, 2018
    #4
  5. JR.

    JR.

    Joined:
    Oct 2, 2017
    Messages:
    21
    Likes Received:
    1
    All makes good sense and it sounds like I’m aligned.

    One question : what’s ni?
     
    JR., Mar 10, 2018
    #5
  6. JR.

    Drmdcpa VIP Member

    Joined:
    Aug 2, 2017
    Messages:
    423
    Likes Received:
    30
    Really what are you acc101 first few weeks?

    DC = Direct Cost
    DL = Direct Labor
    DM = Direct Materials

    Ok this is actual Acc102 not 101 ; )

    NI = bottom line = pi = profit = net income. I chose ni because I thought that you would understand that term and I could not type the symbol of pi without effort.

    Sales price - (dm + dl) = gp = contribution

    gp - oh = ni
     
    Drmdcpa, Mar 10, 2018
    #6
    1. Advertisements

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments (here). After that, you can post your question and our members will help you out.