Materials Requirement Planning - MRP

And finance Allah shmoop What do you need to know

about product costing In a nutshell Products there what companies

make and sell and well track and fix and upgrade

and lather Rinse Repeat until they make a lot of

profit or go bankrupt well especially if the product that

they make is shampoo Well the tracking and accounting for

products is actually strangely complex Why Well accountants have to

find ways to build clients right Yeah that's an accounting

joke Assorted But actually the tracking of products is in

theory a good way to optimize the way in which

managers run a business So products get looked at through

a whole bunch of lenses like this one and this

one and this one Weird products Weird filtered lenses So

let's start by breaking up a product so that its

production fits into a time schema We'LL think about all

the units of shampoo for bald men that scalp and

shoulders makes in a quarter of a lot of units

and gas Bald men shampoo too It's not just for

you know the haired all right We'LL scalp and shoulders

and makes a million bottles in those ninety one day's

important point here Product costs are recognized not as the

stuff is made but rather as expenses when they are

sold So they all sit on the balance sheet as

an asset usually at their cost or book value until

told otherwise those our product costs But then there are

costs incurred keeping the home fires burning as it were

you know making the shampoo But the workers in the

factory keep being paid whether bottles are sold or not

Same deal with the electricity and gas bills and insurance

and rent and so on All those or costs incurred

in that period and in parallel period costs are usually

expensed in the period in which they were incurred like

a quarter or a month or a year is a

period to get a clearer picture of the meaning of

measuring and assessing of all things product Divide that shampoo

bottle into two components you know like that First comes

the direct manufacturing costs of that bottle Stuff like the

goop inside of it You know the bottle itself the

shrink wrapping and packaging for anti tampering security like it

would not be cool for a prankster It's safe way

to replace the shampoo in a bottle of shampoo for

haired people with Nair So that's direct direct cost to

make the thing Then you have indirect costs which includes

like well pretty much everything else Or at least all

the other things that go into the process of making

the shampoo You know from the capital originally spent like

interest on it and now being depreciated on the giant

twenty thousand gallons that oh gu to the commitments of

paying rent on the buildings for years ahead and insurance

and employee pension benefit things all indirect costs direct cost

break into a few subcategories Here is well so well

let's just note um you have materials like plastic bottle

goop inside shrink wrap safety rap thing cleverly called direct

materials costs or raw uncooked materials for a manufacturing company

that makes coffee mugs with swear words on them Well

it'd be the mug itself with raw materials of clay

and glaze and then the ink for the swears and

then the daily cost of the robot Engraving them all

raw materials and direct costs and you have to figure

out how you want allocate cost of the kiln to

drive that thing there That's probably a direct costs as

well Appreciating the capital cost toe by that robot though

the swear word righty two thousand That would be an

indirect costs Got it So if it was human and

not a robot then direct labor would be a cost

of the human painting on you and someone that's direct

labour And then you have the third component of direct

product costs here which is just overhead like think mush

pot for every other expense to be thrown into the

secretaries who take orders and manage the building Maintenance ops

the janitors and of course yes the lawyers Don't forget

the lawyers although we wish we could They're a part

of what's called indirect labor in that they you know

labour but only indirectly to do the most important part

of what shareholders wanted to dio with a company to

do anyway which is to produce mugs or shampoo or

whatever a given company does for a living So we

saw direct materials these things and of course there are

indirect materials like lube for the robot and solvent to

clean spilled clay and glaze off the floor and the

monthly cleaning service for that Oh Gu And also in

manufacturing overhead comes the depreciation of the cap ex or

capital expenditures and the amortization of sales output Deals like

those contracts on anything else They all go into the

mush pot so here's more vocab to throw it your

head as it relates to the cost of products or

product costing You have prime costs like no relation to

the rib Prime means primary stuff you need to build

units of your product It's not just the materials that

go into the mugs or shampoo bottles or whatever's It's

also the labour behind it that assembled it ever so

lovingly ish So the term prime cost is usually attributed

to companies who make some things from nothing's like That

shampoo maker takes eighteen parts lye soap dissolves It mixes

it with waters from Nee Paul then ads fourteen units

of whale blubber and four drops of chlorine which it

is carefully synthesized to be of jaws The right concentration

or density that is the shampoo maker makes the product

prime ingredients for primary costs But other manufacturers do more

assembling then making like think about a carmaker getting great

tax benefits and anti protectionist breaks by assembling cars in

the country in which they're being sold That companies selling

oh say Ford trucks in France Lew Ford might have

made their engine in Mexico then bought tires locally from

Michelin and then brought in windshield wiper seats and other

leather goods from Morocco and then the electric guidance system

from Israel and well the rest shipped in from the

U S Of a Well all the parts were made

They just needed labor to assemble them in France and

be all ready to drive on little tiny one D

five hundred year old roads with bottles In that case

the manufacturing term for product cost really revolves around conversion

costs That is you're converting already assembled subsets of raw

materials into a finished good which people actually want Yes

they actually want these things So if these air manufacturing

costs and what are non manufacturing costs Well basically two

things the company has to be organized or administered So

there are secretaries and lawyers and CEOs and CFOs and

line managers and yes accountants They're all overhead They don't

actually make the product They just rule over people who

do and they get lumped as administrative costs They you

know administer So that's one category The other marketing Yeah

like how do you get stores to stock your shampoo

for bald men And how do you assess what color

bottle works best to sell at Christmas time And how

do you know if you should suggest a retail price

of seven ninety nine seven ninety five or just say

about eight bucks Yeah the marketing department deals with all

that and here's where it gets dicey Let's say you

sell five different types of shampoo Shampoo for bald men

shampoo for bald women Yes much smaller market shampoo for

the nether region And then of course shampoo for Democrats

in the Blue Bottle and shampoo for Republicans in the

Red One Yeah that's five products You spend one hundred

million dollars a year marketing them Well the division manager

of Shampoo for the Nether region just like all the

other managers gets paid on operating profits of her division

She feels she doesn't need marketing because everyone who wants

sf tnr yeah already knows about it and buys it

secretly Yeah they pay cash and quietly walk out of

the store Yet she gets charged a product cost of

one fifth of the marketing budget or twenty million dollars

that goes on her bottom line against her bottom line

So she gets paid a lot less in bonus money

then does the flagship brand shampoo for Bald Man which

really doesn't need the marketing spin because it's a very

competitive out there Well she might argue that the marketing

should be allocated according to the units sold of that

particular product or based on a brand Surveys toe why

people buy a given product But just dividing the marketing

spend in fifties and an equally apportioning it feels very

unfair to her right and make sense Well The company's

most senior management however wants this to be a team

company a team production a team vibe in its corporate

culture So it applies a kind of cost allocation socialism

to the big expenses They're not fair talked to a

bald guy or gal about fairness Yeah well what do 00:08:39.511 --> [endTime] you think Oh no