Management and decision making
3.1 Concept of future, opportunity, replacement, import and export costs.
Future costs: these are relevant costs that are used in decision-making that will affect future results. These costs can also serve to measure the performance of those responsible and administrators if we consider them as standard costs.
Opportunity costs: it is understood as the cost that is incurred when making a decision and not another. It is that value or utility that is sacrificed to choose an alternative A and despise an option B. Taking a path means that the benefit offered by the discarded path is renounced.
Replacement cost: it is what it represents for choosing one thing instead of another, which is common in the business world and is not recorded in the accounting, but in many cases it has a great significance, so much so that in copious occasions it is taken decision-making is final.
Import costs: this is the name of the cost resulting from acquisitions made outside the country where it is important to establish the cost of the original foreign currency plus the expenses that the purchase requires, the import duties or taxes, and the expenses incurred. in the country until the merchandise arrives at the warehouse. This is a typical surcharge cost case.
Export costs: it is the sum of the expenses that originate the different acts directed to the export, these acts vary depending on the negotiation or quotation that is carried out, which are established by the international negotiation term used, since each export is unique and does not originate the same type of acts and therefore the export expenses are not the same.
3.2 Decisions: location of the plant, variations in installed capacity, replacement of fixed assets.
Location of the plant: The decision of the location of the production plant implies a long-term immobilization of financial resources, especially in the case of a company that requires sophisticated production plants.
Variations in installed capacity: Variations in company productivity. Any report that reveals a change in costs indicates a variation in company productivity. Reports of damage, quantity deviation and analysis of idle machines. Attributable interest as a factor in productivity decisions.
Fixed asset replacement: The replacement analysis is used to find out if a piece of equipment is operating economically or if the operating costs can be decreased by purchasing new equipment.
3.3 Decision to make or buy.
To make this decision we must take into account the cost factor. Since the decision between buying or manufacturing is made by comparing the acquisition costs with those of producing the item.
To determine the investments, the three basic costs must be accurately calculated: Raw material, Labor, General Expenses
And other factors that influence and that do not have to do with costs are:
Availability, cost – price, quantity, quality, supply and technology.
The decision between manufacturing or buying cannot be a permanent determination. The factors that intervene in it are constantly changing, such as technology, production methods, capacities, capital and the cost of capital.
Often the company reflecting on the question of manufacturing or buying has already decided to produce the item of which the part is separate. Therefore, a secondary decision to be made is whether the increased investment required to manufacture the part is justified by the expected cost savings.
The funds invested have to produce a rate of return in accordance with the long-term objectives; in other words, the investment must produce returns (profits) that are at least equal to those available in other alternative means of investment.
If the two investment alternatives between buying or manufacturing produce the same effect on the company, the most convenient project is the one that involves less “variability” (or insecurity regarding the current flow) for the same return (profits).
Conversely, if the two investment alternatives between buying or manufacturing produce the same variability, the best is the one that produces the highest value in income.
So take your time, see all the factors that influence to make this decision.
3.4 Optimization of the production mix.
It consists of choosing a production mix with the objective of maximizing profits; looking for the combination of products that give the best results without modifying the total production level, sales prices, costs or its quality. Trying to find the best result with the available resources.
When choosing a product mix, we are not only referring to the total number of product lines or items that a company offers to its customers; It also consists of analyzing the length (total of marks by the number of lines), the depth (how many versions of each product is offered within a line) and their consistency (how similar are the lines for their final use, requirements production, distribution channels, etc.).
Products that have the highest contribution percentages are selected, and it is about producing the largest quantity as they are the most profitable for the company since fixed costs will remain constant regardless of the volume and type of product manufactured.
There are several reasons to expand a product line, the main one is to have additional profits, however there are other reasons such as trying to satisfy customers and distributors, taking advantage of excess capacity, managing a complete line to alienate competitors, etc.
3.5 Additional sales or processing decision.
Modifications to the product may affect quality, characteristics or features, and design. Improving quality may increase the durability, reliability or safety of durable consumer products, or the nutritional capacity, taste or taste of food products. But an increase in quality generally implies an increase in cost, which the consumer will only be willing to pay if he perceives the improvement of the product or is more demanding and values its quality. An improvement of the characteristics or benefits increases its utility, performance, safety or comfort. The change in the design or style of the product improves its attractiveness. In some companies, two or more articles are manufactured by the same process and using the same raw material. During the common production process, one product cannot be distinguished from another, until a stage is reached that is normally known as the separation point.
3.6 Decision to delete a product
Process of withdrawing or abandoning a product from the range or portfolio offered. It can be both a new product, which has failed, and another that has been on the market for a long time.
The elimination criteria of a product can be very diverse: sales have decreased, the product has become technologically out of date, it has gone out of fashion, it has been overtaken by a competitor, another substitute product has been launched, it has stopped producing benefits, the potential market has shrunk etc.
The decision to remove a product is complex and requires a detailed examination of the internal and external factors and functions of the company. Such a decision is usually more formal the greater the size, diversity of products and technology of the organization.
It is necessary to attend to the interrelationships between the commercial, organizational, productive and financial aspects of the different products and of these with other external forces to the company, when making decisions about the elimination, modification or introduction of products.
Companies operating in a technologically innovative environment have been shown to tend to treat the product phase-out process as an integral part of their new product development process. In contrast, in companies operating in a strongly competitive environment, the products that are candidates for phase-out are generally products that experience operational problems, as well as strong competition, and whose estimated sales volumes and market share do not meet the expectations of the direction of the company.
3.7 Diversification decisions, to accept or reject special orders.
When we talk about a Special Order, we refer to sales that are outside of normal sales; that is, the sales that we made that were not included in the development of the activities. Therefore, a special request implies making a decision that for the organization is the most correct, regarding the effects that this request brings with it. Sometimes a special order is presented to the company which requires it to be sold at a lower price than the market price. In general this special order should be accepted if:
* The additional income is greater than the additional costs when accepting the special order.
* If there is idle capacity in the company, the special order does not produce an increase in fixed costs and its price is greater than variable costs.
* In addition, the special discounts offered to special orders do not generate discontent in former customers.
Special orders have several characteristics, among which are:
* They are received once the financial year has started.
* The company previously established the sale prices without considering the possibility that these special orders could be served.
* The company has surplus production and marketing capacity * They are important orders that if not met could benefit a competitor.
In principle, the only ones that would increase if the special request is met would be the variable costs.
In case of meeting the special request, the capacity must be expanded and the corresponding additional incremental costs must be added. Therefore, the part of fixed costs that increases as a consequence of this special request will have to be added to the variable costs.
3.8 Costs for determining sales prices.
Costs influence the determination of the prices of products to be placed on the market, since any company tries to maximize profits with more favorable prices and minimize costs with good control.
There are many cost parameters to determine prices, among others:
– Based on total cost.
– Based on conversion cost.
– Based on standard cost.
– Based on direct cost.
– Based on investment return.
– Based on capital cost.
For example, if the company has the following plan:
Production required (units) 100,000
Projected production (units) 90,000
If the projected cost for 90,000 units is as follows:
- Determination of the sale price based on the total unit cost. Based on the total cost, the projected unit price will be:
The advantage of this method is that it is easy to calculate.
The disadvantage is that this procedure ignores the behavior of the supply and demand in the market and therefore the price.
- Determination of the sale price based on the unit cost of conversion.
Bibliographical sources
https://www.clubensayos.com/Temas-Variados/31-CONCEPTOS-DE-COSTOS-FUTUROS-DE-OPORTUNIDAD-DE/1771253.html
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