Cost rationing in cost planning: raw materials - energy - labor

When it is necessary to calculate the cost of any product/service, there is always a need to determine the consumption rates of those cost elements themselves without which it is impossible to produce it at all direct variable costs.

These include:

• normalized raw materials/materials
• regulated energy resources
• standardized work (piecework)

Costs in moneyper unit of production, both for raw materials/materials and energy resources, are calculated by multiplying their norm by the net price units of this resource:

And for labor, they are determined based on the normalized rates for the professions involved in its production.

If with the price of raw materials and energy, everything is clear (for how much we will buy, such a price(without VAT) and put it in the costs), then here is about the consumption rates, namely, where to get them to include in the calculation articles of direct variable costs when calculating the cost, in a little more detail.

The recipe itself (technological regulations) according to the release of these products, it assumes how much and what is required per unit of output.

Well, let's say you decide to produce some kind of high-tech product, for example, a bulletproof vest from Twaron para-aramid fiber, the technology of which is possessed only by Teijin Aramid. Naturally, the consumption rates for these products are not known to anyone, and if you decide to master this production, then these standards for cost planning and the economy of your business can be provided directly only by the manufacturer responsible for this technology.

And if you decide to bake pies with potatoes?! Here, to understand how much is needed to produce one pie, you just need to type in a Google or Yandex search query and get a lot of recipes for every taste.

For a better understanding of how raw materials, energy resources and labor are normalized in the production of products/services, let's give a simple example.

We have a mini-coffee for making 2 types of hot drinks: tea and coffee. Each unit of production is a portion of a drink in the volume of 150 ml.

Rationing of raw materials

At this stage, it is necessary to determine the consumption rates of raw materials that are necessary for the production of tea and coffee.

In our case, the raw formulation corresponds to the actual data obtained from experience and constant production experiments to give the best taste qualities to these drinks.

That is, before the start of industrial production, we already know how much and what raw materials need to be added to 150 ml of the drink in order to produce a product of appropriate quality.

For 150 ml of tea, it is necessary:

• special mint leaves – 3 gr.
• a bag of black bayh tea   – 2 gr.
• lemon – 10 gr.

For 150 ml of coffee, you need:

• special insoluble coffee – 20 g.
• cream – 35 gr.

The planned norms in subsequent periods can be adjusted based on the data of the reporting period (the actual consumption of raw materials and dividing them by the volume of output) and how they meet the expectations of consumers.

The consumption of standardized raw materials can also include losses (if any) and returnable waste.

Losses This is an overspending of a certain tangible asset associated with the release of products/services, for reasons of a technological nature or industrial negligence.

What does that mean?

For example, in our case.

For 150 ml of tea, 155 ml of water is necessary, respectively. The loss will amount to 5 ml as a result of its evaporation during heating and boiling (production process). These losses are related to a technological reason.

And if an employee spills water when filling a kettle, then this overspending will already be associated with negligence.

In both cases, it is necessary to pay for overspending anyway, which ultimately falls on the same cost.

And returnable waste This is something that has not entered into condition. That is, something that was formed as a result of production, but is not related to marketable products and has certain consumer properties that allow it to be realized/ sold.

In our example, the returnable waste can be all this brewed waste mass (with 150 ml of tea 10 substances), which we can, for example, sell for a small price to some local nursery for soil fertilization. In this case, in the article raw materials for our products, the returnable waste will go with the sign "-", as a kind of compensation for our direct variable costs.

Rationing of energy resources

Using a wattmeter, we will check the actual power consumption and calculate what the actual electricity consumption of the kettle (when operating under these conditions) will be for 150 ml of boiled water.

The volume of water in 1 liter boils in 7 minutes, the actual power according to the wattmeter is 1735 W.

I.e., in 1 hour of operation, the consumption is 1.74 kW, and in 7 minutes = 0.203 kWh (7 min x 1.74 kWh/60 min).

At the same time, 0.03 kWh (0.203 kWh x 0.15 liters/1 liter) of electricity is required for 150 ml (1 serving).

Or, alternatively, according to the data of the electricity consumption meter, determine the fact, and only then add it to the planned consumption rate.

The distribution of eclectic energy by product types, both for tea and coffee, corresponds to the amount of kWh consumed for heating 150 ml of water.

Thus, the energy consumption for each type of drink will be.

For 150 ml of tea:

• water <0.00015 m3
• electricity is 0.03 kWh

For 150 ml of coffee:

• water <0.00015 m3
• electricity is 0.03 kWh

Rationing of the work of pieceworkers: determining prices by product type and planning staffing

At this stage, we need to normalize the work of employees and calculate prices for each type of product.

In preparation (maintenance) tea and coffee require the participation of 2 professions:

• Compounding agent - dispenses ingredients into drinks
• Bartender - fills with boiling water and delivers drinks to customers

There are two factors to consider here:

• The maximum possible amount of work performed (the number of servings of a drink) during the working day for each profession, without prejudice to their rights to comfortable working conditions (to have a technical and lunch break, etc.).
• The average monthly salary is not lower than the industry average or higher, so that the employee is motivated to perform such work.

Based on these factors, we estimate how many servings of tea and coffee a receptionist and a bartender can produce / serve in 8 hours of time (the labor rate of working hours in this profession).

Everything is based purely on a conditional assessment and the visibility of how much this volume will be physically lifting (stressful) for employees during the day.

Let's determine for the receptionist and the bartender the physically possible amount of work by type of product with the corresponding average monthly (22 working days per month) salary for each type.

Based on these data, we can already calculate the prices for each profession by product type.

The compounding specialist can produce the maximum volume of servings (150 ml) in 8 hours of the working day:

• tea - 100 pcs. (with this daily volume, the average monthly salary will be 47,000 RUB)
• coffee - 150 pcs. (with this daily volume, the average monthly salary will be 40 000 RUB)

The bartender can serve the maximum amount of servings (150 ml) in 8 hours of the working day:

• tea - 70 pcs. (with this daily volume, the average monthly salary will be 45,000 RUB)
• coffee - 70 pcs. (with this daily volume, the average monthly salary will be 45,000 RUB)

Based on these data, the price for the prescriber for 1 serving of tea will be 21 RUB, coffee 12 RUB. For the bartender, for 1 serving of tea 29 RUB, coffee 29 RUB.

Let's say that 80 cups of tea and 200 cups of coffee must be produced daily (within the working day).

Based on the established maximum workload standards for one employee for each type of product and the production plan, the need for compilers will be 2.1 people, and bartenders will be 4 people.

2.1 employees cannot be. There is no point in taking the 3rd, because one staff unit will be underloaded.

We will proceed from the fact that it is better to let two prescribers exceed their maximum plan and receive an appropriate surcharge.

As a result, the total monthly wage fund for this volume of tea and coffee 270 993 RUB.

It will be distributed as follows:

• 2.1 prescribers will take 90 933 RUB
• 4 bartenders will cost 180,000 RUB

Thus, the average monthly salary of one receptionist will be 42 625 RUB, and the bartender 45000 RUB.

If, based on the established prices, employees will be able to produce / serve more than the set maximum, then, accordingly, their wages will be higher and vice versa.

As you can see, the labor rationing system is not unambiguous in its approach when determining the labor intensity of a particular type of product/service.

The key factor in all this rationing is, of course, the economics of the business, its profits, which should contribute either to a reduction in labor standards (at the same rate) per unit of production or vice versa.

As a result, we have normalized our products (tea and coffee) for all types of costs used in production, which relate to direct variable costs when calculating and calculating the cost.

Cost rationing in cost planning: raw materials - energy - labor - Something like That!