Product Cost, Imputation, Activity Levels, and Order Points

Product Cost

Acquisition

Purchase of primary materials and other resources + cost of the procurement function - Discounts, commissions, and development shopping.

Storage

Costs originating from holding stock in the warehouse.

Manufacturing

Costs generated at different levels of the manufacturing cycle (transforming primary materials into completed products).

Cost Imputation to Product

Direct Costs

Costs that can be identified with the specific product that caused them.

Indirect Costs

Common costs that are not attributed to any particular department or product.

Semidirect Costs

Costs that cannot be applied directly to a product but can be allocated to a shop, section, or department.

Cost by Level of Activity

Fixed Costs

Costs incurred to make the company operational. These remain constant and are independent of the number of units produced. These are also known as structural costs.

Variable Costs

Operational charges that vary according to the activity level. The amount depends on the number of units produced.

Break-Even Point

The break-even point is the production or sales volume at which total revenue equals total cost. At this point, revenues only cover expenses.

• Revenues increase as the number of units sold or the price increases.
• Variable costs increase as production increases.
• Fixed costs remain constant, independent of production volume.
• Total costs increase, depending on variable costs.

Optimal Order Quantity (VOP)

The optimal order quantity is the amount that should be ordered to minimize total inventory costs.

• Order management costs decrease as the quantity ordered increases.
• Possession costs increase as the order quantity increases.

According to the Wilson model, the optimal order quantity is the one that balances the cost of order management with possession costs. Assumptions:

1. Constant product demand per unit of time.
2. Constant order management cost, independent of the quantity ordered.
3. Constant possession cost of the product per unit of time.
4. No stockouts are allowed; a safety stock is maintained.

Order Point

The stock level that triggers the need to issue a replacement order.

Order lead time depends on:

1. For self-produced items: The length of the production process.
2. For goods supplied by an external supplier:
   • The agreement with the supplier in the supply contract.
   • The frequency of regular orders.
   • For sporadic and verbal orders, supplier delivery times must be tracked.