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  • Product Costing in the Meat gIndustry

    CMC Conference June 2012

    Quebec City

    2010 1 by CSB-System AG, Kestenholz, 2010

  • 2010 2 by CSB-System AG, Kestenholz, 2010

  • That you will come away with:

    An understanding of common pitfalls associated with costing decisionswith costing decisions

    Profit = Price - Cost Costing methods Costing methods Net/Net or FOB Price What to consider when What to consider when

    determining your costing h

    2010 3 by CSB-System AG, Kestenholz, 2010

    approach

  • Agenda

    Background (Packers & Further Processors) Background (Packers & Further Processors) Why Calculate Cost of Products? What to consider in determining Costing Approach? Types of Costing Methods

    Example O / Reverse BOM/Disassemble

    Cutout Analysis BOM (Hotdog) BOM (Hotdog)

    Summary and Rap-up Questions

    2010 4 by CSB-System AG, Kestenholz, 2010

    Q

  • Why Calculate Cost of Products?

    Profit: Goal in business is to sell products for more than cost Effective: Ensure you are selling the right products (highest margin) Ability to analyze costs to support improvement decisions Ability to analyze costs to support improvement decisions How should we price getting new business or new product line? What if Analysis Management by exceptions (variance) Bench mark best practices Targets for Continuous improvement Targets for Continuous improvement

    There is no right or wrong way of product costing, each company has to find the best way of costing according to

    2010 5 by CSB-System AG, Kestenholz, 2010

    p y y g gtheir specific processes, customers and resources

  • Why Calculate Costs

    Although sales increased slightly in fiscal 2010, the companys operating results declined rapidly. PricewaterhouseCoopers attributed the decline to a numberPricewaterhouseCoopers attributed the decline to a number of factors, including insufficient pricing and higher than forecast raw material costs on certain high-volume products; higher labour costs that were incurred becauseproducts; higher labour costs that were incurred because overtime was needed to meet unforeseen customer demand; and unscheduled production shutdowns caused

    2010 6 by CSB-System AG, Kestenholz, 2010

    because Colonial didnt have cash to operate

  • What to consider in determining Costing Approach?Costing Approach?

    Keep it simple Keep it simple Easy to understand Focused on products that effect your profits (+/-) Focused on products that effect your profits (+/-) Ensure your are capturing the true costs Ability to change quickly Ability to change quickly Support new business and new product introduction Cost Containment/ Continuous ImprovementCost Containment/ Continuous Improvement Support determining priorities (add $$ to variances) Support decision on Outsource or Make Opportunities

    2010 7 by CSB-System AG, Kestenholz, 2010

    pp pp Administrative effort to maintain

  • Costing Methods

    Standard Costing (Bill of Materials BOM) Actual/Lot Costs Ability to Bear Cutout Valuation for Packers Forecast Costing (long term contracts)

    2010 8 by CSB-System AG, Kestenholz, 2010

  • Standard Costing

    Product costs is calculated based on BOM Product costs is calculated based on BOM (Recipes in Food Industry)

    Direct costs include the raw material packaging Direct costs include the raw material, packaging and the labour cost to produce the product

    Indirect costs are expressed in terms of multiplier Indirect costs are expressed in terms of multiplier factors and extras such as overhead

    Standard cost is used as an average product cost Standard cost is used as an average product cost over a period of time and is followed up by comparing it with the actual cost (variance)

    2010 9 by CSB-System AG, Kestenholz, 2010

  • Actual/Lot Cost

    Th t l h i f i di t The actual purchase price of ingredients are attributed to your finished goods

    The actual yield for producing each lot provides a y p g punique cost for each lot

    The commodity prices of raw ingredients can vary significantly (substitutions or force in ingredients)significantly (substitutions or force in ingredients)

    In further processing operations, each lot of raw material has a different cost and when used in

    d ti h b t h t h diff tproduction causes each batch to have a different cost

    For Lot calculation to be efficient, it requires a

    2010 10 by CSB-System AG, Kestenholz, 2010

    , qcomputer system to keep track of the product flow

  • Ability to Bear(Market Value Allocation)(Market Value Allocation)

    This is used by Packers or Steaking Operations This approach allocates costs in proportion to the

    cost objects ability to bear them An example the raw material cost of a carcass or

    primal is the allocation to the components createdprimal is the allocation to the components created from the cutting process based on market value

    The market value of the steaks are more than theThe market value of the steaks are more than the cube steaks which are more than the trim

    2010 11 by CSB-System AG, Kestenholz, 2010

  • Cutout Valuation (Packers)( )

    This is a standard measurement in Slaughter goperations (USDA Beef and Pork Carcass Cutout)

    Used by Packers as there are so many different ways of breaking up the carcass They are not ableways of breaking up the carcass. They are not able to allocate costs via traditional methods

    Takes the commodity price of primals, subtracts the i t (l b ) d k i bconversion costs (labour) and packaging, by-

    products to calculate the value of carcass or animal Compares calculated cutout value to actual p

    purchase price of animal Value of the finished goods have little to do with the

    cost to convert the animal into a finished good

    2010 12 by CSB-System AG, Kestenholz, 2010

    cost to convert the animal into a finished good. Value of the finished goods is based on some external market list (USDA, Urner Barry, Chisholm)

  • What to consider when determining your costing approachyour costing approach

    Perfection = Ideal conditions: this creates an environment of high accuracy but creates frustration as this is not realistically attainablefrustration as this is not realistically attainable

    Practical = Realistic standards that employees can attainattain

    Need to look at the value from capturing data, matched against the effort/cost in monitoring eachmatched against the effort/cost in monitoring each measurement to determine what level of detail you need to capture data

    2010 13 by CSB-System AG, Kestenholz, 2010

    you need to capture data

  • Types of Costs

    Variable costs Variable costs Raw materials (meat, spices, other ingredients) Packaging Packaging Landed Costs (Freight, Exchange, Duty, Broker)

    Labour (different rates, and different areas)Labour (different rates, and different areas) Fixed Costs OverheadOverhead Admin. Expense

    Selling & Delivery Costs

    2010 14 by CSB-System AG, Kestenholz, 2010

    Selling & Delivery Costs Customer specific related costs

  • Labour Costs (Level of Detail)

    Different Skills or Rates Different Skills or Rates Lead hand

    Areas/Line where Labour is to be tracked Production task (cutting, trimming, blending,

    i di i k h t )grinding, massaging, smokehouse , etc) Packaging tasks Shipping tasks

    2010 15 by CSB-System AG, Kestenholz, 2010

  • What can be included in OverheadWhat can be included in Overhead

    Depreciation Maintenance Plant Management Energy Water Office Executives salaries Storage (freezer, off-site, etc)

    2010 16 by CSB-System AG, Kestenholz, 2010

  • Calculation of Net/Net Selling PriceFOB PriceFOB Price

    Freight/Delivery Rebates and trade promotions Sales & Admin. Warehouse Allowance Brokers/Agents Commissions Commissions

    These costs are normally allocated based on the customer receiving the product

    2010 17 by CSB-System AG, Kestenholz, 2010

    customer receiving the product

  • Processes that effect Raw Material CostsCosts

    Production process losses (yields) Cooler Shrink Ability to Bear (Market Value Allocation) By-Productsy Substitutions Fresh or FrozenFresh or Frozen Quality

    2010 18 by CSB-System AG, Kestenholz, 2010

  • Ability to Bear (Market Value Allocation)(Market Value Allocation)

    Front

    Back

    2010 19 by CSB-System AG, Kestenholz, 2010

  • Excel Ability to Bear Examples

    2010 20 by CSB-System AG, Kestenholz, 2010

  • Weiner Blend Process

    Chop -Grind Blend

    2010 21 by CSB-System AG, Kestenholz, 2010Stuff Cook Package

  • Excel BOM Example 1

    2010 22 by CSB-System AG, Kestenholz, 2010

  • Excel BOM Example 2p

    2010 23 by CSB-System AG, Kestenholz, 2010

  • Excel versus IntegratedAccurate reliable DataAccurate reliable Data

    D plicate entr Duplicate entry Prone to errors No or little validation Administration time consuming Limited flexibility to change Become out-dated very quickly Commodity costs change very quickly Calculation of multi methods of costing very difficult

    2010 24 by CSB-System AG, Kestenholz, 2010

    g y Risk of next person not understanding the sheet

  • Modeling Business in an Integrated Solution

    2010 25 by CSB-System AG, Kestenholz, 2010

  • Summarize and Wrap-up

    Manual vs. Software Application Level of detail Frequency of Updates Measure Variance Better manage costs, will protect the bottom line

    (profit)