Full Costing

Categories: Accounting, Metrics

There’s business savvy…and then there’s business genius. And our little company, Motor Garden, LLC, is definitely in the “business genius” category.

We spend our days in the she-shed in the backyard refurbishing and refinishing old car parts, and then we weld ‘em to stakes and sell ‘em as yard art. They’re a huge hit, and we’re making a ton of money. (Ever seen a bedazzled radiator fan clutch on a stick, peeking out from between some rosebushes in spring? It’s a thing of beauty.)

Anyway, we’re doing so well that we’re considering expanding our business. But before we do, we want to get a handle on our actual operating costs, so we bring in an accountant. He decides to evaluate our finances based on a full costing approach, which basically means that he wants to look at how much it costs to produce one of our amazing products from start to finish. And we’re not just talking about the cost of the actual materials here, like the radiator fan clutch and the rhinestones. We’re talking about all of our direct costs, like the she-shed’s electricity bill, the gas money we spend driving around retrieving car parts, and even the salary we pay ourselves out of Motor Garden’s profits. Everything that goes into producing and selling our unique creations is considered an expense in our income statements.

The full costing method isn’t the only approach we can use to figure out our costs. But for businesses that have a lot of manufacturing and production costs, like ours, it can be a really helpful tool in our heavily bedazzled financial management toolkit.

Related or Semi-related Video

Cost Accounting: What is a Load Factor?1 Views

00:00

and finance Allah shmoop What is a load factor All

00:07

right people You know those wide load trailer's right know

00:11

and not the NFL linemen These wide loads they're just

00:15

like normal trucks on ly wider like maybe twenty percent

00:19

thirty percent wider If you're moving this fine two bedroom

00:22

with a den from here to here well you'd better

00:25

figure in plenty of room for the extra with it'LL

00:28

take during the mountain pass turns Okay well that's sort

00:32

of how load factors factor into proper cost allocations in

00:36

a company you have to add in the load will

00:39

load Factors generally measure how much a given system can

00:43

handle like it's used a lot in airlines The load

00:46

factor measures how full airplanes are when they fly Like

00:50

if you have three hundred seats on a plane and

00:52

it flies with two hundred passengers Welcome Your load factor

00:55

is about sixty six point seven percent That's two hundred

00:58

divided by three hundred The term also gets used in

01:01

energy output Like the load factor measures How much energy

01:05

is getting used now compared to the maximum output possible

01:09

Well the key factor in both these common examples how

01:11

much are we using Our resource is that's key question

01:15

Can we get Mohr out of what we have Okay

01:18

you have this airplane you flight with a hundred empty

01:21

seats The fuel costs the cost for the pilots the

01:23

flight attendants the peanuts the thin foam pillows They're all

01:26

essentially the same with two hundred passengers as they are

01:30

with three hundred So whatever you can do to get

01:32

a plane full well that's probably worth it Cut prices

01:35

have ticket raffles for publicity whatever it takes Or you

01:39

own the grill factory not a barbecue joint A dental

01:42

office Yeah these bad boys you've purchased five Ortho bought

01:46

five thousand units the latest in robot dental implant technology

01:51

They fully replaced those pesky human orthodontist You had to

01:54

pay two hundred grand a year The Ortho Baht can

01:56

install five grills in a typical eight hour day It

01:59

costs five hundred bucks a day to operate the machines

02:01

and that includes power maintenance appreciation and the grill itself

02:05

Meanwhile the office costs one hundred grand a month and

02:07

overhead and that includes renting the office space insurance magazines

02:11

for the waiting room WiFi marketing Free grill work for

02:13

your family salary for the receptionist and so on Though

02:16

you've been looking at the possibility of getting the robo

02:19

receptive about X nine The current receptionist is your cousin

02:22

Jenny though so well you can't pull the trigger just

02:25

yet anyway All that stuff rolled together two hundred grand

02:27

a month all in You have to pay that amount

02:29

no matter what Plus the costs of powering up the

02:32

ortho bots comes to fifty Grand Mohr a month That's

02:34

five hundred a day times five days a week and

02:37

four weeks a month Time Five robots Yeah that's fifty

02:39

grand so the office costs hundred fifty thousand dollars a

02:42

month to run Meanwhile you have the capacity of five

02:44

hundred grilling and plants a month That's a five a

02:47

day for each of the five bodies Time Five days

02:49

a week times four weeks In a month we'LL a

02:52

grill implant costs two thousand dollars to perform raw materials

02:56

on that implant or seven hundred fifty bucks Each one

02:58

has a gross profit of twelve hundred fifty dollars ignoring

03:02

all the other load factors there So if the machines

03:04

run at full capacity you'LL have gross profit of six

03:06

hundred twenty five thousand dollars or twelve hundred fifty times

03:09

five hundred procedures Then you subtract one hundred fifty grand

03:12

overhead and you're netting four hundred seventy five grand a

03:14

month before taxes and such Yeah not bad But that

03:17

figure only counts if you're at full capacity a load

03:21

factor of one hundred percent Well it gets trickier if

03:24

that load factor is lower So let's say the load

03:27

factor for a month comes in at only twenty percent

03:30

Like you only do one hundred procedures in a month

03:32

We'LL then gross profit is only one hundred twenty five

03:35

grand and you gotta subtract out there in the one

03:36

hundred fifty grand in fixed overhead And oh now you're

03:40

twenty five thousand bucks in the red Well at that

03:43

point you might think about taking some steps to increase

03:46

the load Factor lowering prices toe fifteen hundred procedure But

03:50

note that the gross profit if you lower prices on

03:52

each one well then that drops to seven hundred fifty

03:55

bucks But if it pushes the load factor from twenty

03:57

percent tough fifty percent well then it might be worth

04:00

making the change Two hundred fifty procedures times seven hundred

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fifty equals one hundred eighty seven thousand five hundred dollars

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and you subtract the overhead of one hundred fifty and

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then you're back in the black of thirty seven five

04:10

a month Well on the other end if your load

04:12

factor gets too high it might be time to expand

04:15

capacity So say your typical month runs at ninety percent

04:19

Load factor Then prom season comes up in A bunch

04:21

of teenagers want grills for their prom pictures Demand is

04:25

twenty percent higher than normal but you can't absorb all

04:27

that demand You have to turn people away And wow

04:30

that's expensive to dio So if load factor starts to

04:33

get too high might be time to add another ortho

04:36

bod Just don't get tempted by the Recep Toba Next

04:39

time you're browsing it Robot Corp We'LL never hear the

04:41

end of it at Thanksgiving If you give your cousin

04:44

the boot Yeah no

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