Understanding Variables Of Business Operations And Cost Management

Production Cost

From the very beginning of innovation and inventory management approach it is defined that each business is professionally managed through multiple numbers of business function. In order to manage each aspect the business and operation functions are mostly responsible. The members associated to business firm are responsible to manage these functions and operations (Eriksson et al., 2015). The marketing departments of business firms are responsible for sales to generate and meet consumer’s demand. The cash flow function, commercial assets and invested capital are manages by the finance department of business firms.

There are different variables which play key roles in business operation, manufacturing and production purposes (Carande-Kulis et al., 2015). It is mandatory for the finance head of the businesses to consider these variables so that the business firm can effectively generate competitive advantages and commercial revenue. The improvement process will become more effective with the operational success of these variables. The roles of these variables are elaborated in the below section:

Production cost: Production cost is referred to as that cost which is incurred by the business firms during the products manufacturing and service delivery phase. This variable is comprises of different expenses such as material cost, labour cost, consumable manufacturing supply cost etc (McKenzie, 2015). Apart from this, the tax levied by royalties is also recognized as the production cost, this is mostly owed by the associated natural resources. In other words, the production cost holds the expenditure related to creation or creation of goods and products. However, any cost can be identified as a production cost when it is directly combined to the business firm’s revenue.

The manufacturers will avail experiences regarding production cost about both the material need and manufacturing cost. Both direct cost and indirect cost are associated to the production cost. The ratio of total production cost and numbers of units produced can calculate the overall production cost (Torriti & Ikpe, 2014). As soon as the cost per unit is calculated the information becomes useful to estimate the accurate sales price of the business units. In order to calculate break even the sales price needs to cover per unit cost. If the per unit cost gets exceed then that will bring profit to the business firm on the other hand, prices below per unit cost will cause loss.

Inventory cost: Inventory cost is referred to as the combined cost of procurement, storage and inventory management as well. It also holds the ordering cost, stock out cost and shipping or carrying cost (Eriksson et al., 2015).  In other words, inventory cost is categorized in three different sub headings such as ordering inventory cost, inventory carrying cost and shortage or stock out cost as well as replenishment cost. The ordering inventory cost is that cost which is incurred to the procuring inventory. Apart from this it also holds the cost of purchase and inbound logistics. For minimizing the purchase ordering cost the business firms are required to use the concept of economic order quality (Kerzner & Kerzner, 2017). In order to fulfill need of the consumer’s changes can result in the process flow of the production.

Inventory Cost

The inventory cost is classified in to ordering cost, holding cost and administrative cost. The ordering cost includes the procurement departmental wages, payroll tax benefits, labor cost, and engineering staffing cost. On the other hand these costs are involves in overhead cost pool as well as allocated to unit numbers. Apart from this, the holding cost is related to the space that requires holding the inventory. The accounting department is responsible to pay salary or wages to the staffs of the accounts department (Hair et al., 2015). The inventory cost can be separated in three different categories such as raw material, semi finished products, completely finished products. Moreover, it can be said that for understanding the income, expenses and cash flow of business firms the concept of inventory cost is needed to be clear to all associates.

Production capacity: The production cost is the net cost paid for using needful resources to manufacture new products and creative service packages to sell the consumers labors, materials and raw materials in the business firms. With the help of available resources, the maximum amount of output that can be generated from business firm is the production cost. These cost details are generally calculated over months or even day and also can be compared accordingly (Eriksson et al., 2015). This is an efficiency measure that business firms can adjust according to the demand of the consumers. No concept of maximum output is associated to the production cost. The production cost deals with managing raw materials, employees, storage and time as well.

In order to establish a profitable business environment the business owners are required to know the production cost in details. In other words, after knowing the production cost in each step the management has the ability to optimize the production process, schedule and business activities for making better quality products efficiently than the past (Li et al., 2016). In case of cost accounting and managerial accounting, the direct cost of materials, labors and manufacturing are referred to as the production cost. In other words, manufacturing cost, production cost and inventory costs generating from the business firm are the production cost.    

If the demand increases then, the business leaders need to understand the demand curve and the performance effectively. Based on demand the product cost should be prepared by the business firms. In other words, with changing demand the cost or product prices should also be changed accordingly (Carande-Kulis et al., 2015). If demand increases then cost of the product will increase on the other words, if demand decreases then also in order to gain competitive advantages and positive profit range the product cost also increases. Capacity and demand management make sure the timely provision and effective allocation of IT resources in three fundamental ways such as business demand forecasting, application of IT strategies and trends and assessing utilization. All accurate and vital resources are to be identified for the business success.

Production Capacity

According to the need of the business the resources are to be ensured by the business firms. The Key Performance Indicators (KPI) is required to be used for monitoring and communicate successfully in the business (Torriti & Ikpe, 2014). If it is found that, capacity and demand management is not following all needful discipline then, accordingly the fixed cost, variables cost, increased price and rate of throughout increment should be changed for managing the revenue (Shafiee et al., 2018). According to observation, if optimal booking solution is needed then fluctuation demand, advanced product sales and segment market ability are the factors that are to be well managed by the product managers of the business firms. The process of capacity management will increase the participation of the consumers by creating effective adjustable capacity along with a shared capacity.

Arrangement of cross training for employees and using part time employees for business capacity management will give a beneficial environment to the business firms. It will also help to manage the overall revenue of the business organization (Bruijning et al., 2017). From the rate of changing revenues in a yearly basis it is determined that, there are four basic factors which can effectively push a business towards embracement in capacity and demand management. These factors include revenue threat, rapid power rising as well as cooling cost, service declination and low rates of business factor utilization (McKenzie, 2015). For different assumptions the production plan will also vary. Such assumptions are considered in the below section and accordingly the production plan is prepared which will give a clear vision regarding all the cost management aspects.   

Month	January	February	March	April	May	Total Cost ($)
Demand (units)	1500	2800	3000	4200	5400
Unit production cost in ($)	20	23	27	30	38
Capacity (units)	2000	3000	3500	4500	6000
Inventory cost ($)	5	5	5	5	5
Total unit production cost ($)	25	28	32	35	43
Excess production	500	200	500	300	600
Total cost as per capacity ($)	50000	84000	112000	157500	258000	661500
Total cost as per demand ($)	37500	78400	96000	147000	232200	591100
Production plan (units)	1750	2900	3250	4350	5700
Cost as per plan ($)	43750	81200	104000	152250	245100	626300

Hence, for assuring minimum it has been determined that the production should go as follows:

Month	January	February	March	April	May	Total Cost ($)
Production plan (units)	1750	2900	3250	4350	5700
Cost as per plan ($)	43750	81200	104000	152250	245100	626300

Month	January	February	March	April	May	Total Cost ($)
Demand (units)	1575	2940	3150	4410	5670
Unit production cost in ($)	20	23	27	30	38
Capacity (units)	2000	3000	3500	4500	6000
Inventory cost ($)	5	5	5	5	5
Total unit production cost ($)	25	28	32	35	43
Excess production	425	60	350	90	330
Total cost as per capacity ($)	50000	84000	112000	157500	258000	661500
Total cost as per demand ($)	39375	82320	100800	154350	243810	620655
Production plan (units)	1788	2970	3325	4455	5835
Cost as per plan ($)	44688	83160	106400	155925	250905	641078

2. Increase in production cost by $2 every month

Month	January	February	March	April	May	Total Cost ($)
Demand (units)	1500	2800	3000	4200	5400
Unit production cost in ($)	22	25	29	32	40
Capacity (units)	2000	3000	3500	4500	6000
Inventory cost ($)	5	5	5	5	5
Total unit production cost ($)	27	30	34	37	45
Excess production	500	200	500	300	600
Total cost as per capacity ($)	54000	90000	119000	166500	270000	699500
Total cost as per demand ($)	40500	84000	102000	155400	243000	624900
Production plan (units)	1750	2900	3250	4350	5700
Cost as per plan ($)	47250	87000	110500	160950	256500	662200

3. Decrease in capacity by 50 units every month

Month	January	February	March	April	May	Total Cost ($)
Demand (units)	1500	2800	3000	4200	5400
Unit production cost in ($)	20	23	27	30	38
Capacity (units)	1950	2950	3450	4450	5950
Inventory cost ($)	5	5	5	5	5
Total unit production cost ($)	25	28	32	35	43
Excess production	450	150	450	250	550
Total cost as per capacity ($)	48750	82600	110400	155750	255850	653350
Total cost as per demand ($)	37500	78400	96000	147000	232200	591100
Production plan (units)	1725	2875	3225	4325	5675
Cost as per plan ($)	43125	80500	103200	151375	244025	622225

4. Monthly inventory cost is doubled

Month	January	February	March	April	May	Total Cost ($)
Demand (units)	1500	2800	3000	4200	5400
Unit production cost in ($)	20	23	27	30	38
Capacity (units)	2000	3000	3500	4500	6000
Inventory cost ($)	10	10	10	10	10
Total unit production cost ($)	30	33	37	40	48
Excess production	500	200	500	300	600
Total cost as per capacity ($)	60000	99000	129500	180000	288000	756500
Total cost as per demand ($)	45000	92400	111000	168000	259200	675600
Production plan (units)	1750	2900	3250	4350	5700
Cost as per plan ($)	52500	95700	120250	174000	273600	716050

References 

Bruijning, M., Visser, M. D., Muller-Landau, H. C., Wright, S. J., Comita, L. S., Hubbell, S. P., … & Jongejans, E. (2017). Surviving in a cosexual world: A cost-benefit analysis of dioecy in tropical trees. The American Naturalist, 189(3), 297-314.

Carande-Kulis, V., Stevens, J. A., Florence, C. S., Beattie, B. L., & Arias, I. (2015). A cost–benefit analysis of three older adult fall prevention interventions. Journal of safety research, 52, 65-70.

Eriksson, K., Johanson, J., Majkgård, A., & Sharma, D. D. (2015). Experiential knowledge and cost in the internationalization process. In Knowledge, Networks and Power (pp. 41-63). Palgrave Macmillan, London.

Eriksson, K., Johanson, J., Majkgård, A., & Sharma, D. D. (2015). Experiential knowledge and cost in the internationalization process. In Knowledge, Networks and Power (pp. 41-63). Palgrave Macmillan, London.

Hair Jr, J. F., Wolfinbarger, M., Money, A. H., Samouel, P., & Page, M. J. (2015). Essentials of business research methods. Routledge.

Kerzner, H., & Kerzner, H. R. (2017). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.

Li, W., Wu, L., Xia, Y., Wang, Y., Guo, K., Luo, X., … & Zheng, W. (2016, December). On stochastic performance and cost-aware optimal capacity planning of unreliable infrastructure-as-a-service cloud. In International Conference on Algorithms and Architectures for Parallel Processing (pp. 644-657). Springer, Cham.

McKenzie, D. (2015). Identifying and spurring high-growth entrepreneurship: experimental evidence from a business plan competition. The World Bank.

Shafiee, S., Felfernig, A., Hvam, L., Piroozfar, P., & Forza, C. (2018). Cost Benefit Analysis in Product Configuration Systems. In Configuration Workshop 2018 (ConfWS 2018). CEUR-WS.

Torriti, J., & Ikpe, E. (2014). Cost–Benefit Analysis. In Encyclopedia of Law and Economics (pp. 1-8). Springer, New York, NY.