Managerial Accounting - Standard Cost Professor: Martin Taylor

1. University of Texas At Arlington Managerial Accounting - Standard CostProfessor: Martin Taylor Team 5 – Kevin Zheng December 14th, 2012

2. AGENDA Company briefing Standard Cost definition and structure Material cost and variations Labor cost and variations Manufacturing overhead and variations University of Texas At Arlington http://www.uta.edu/

3. Lamex Office Furniture A division of HNI Corporation • Established in 1977.1 million sq ft manufacturing facility in PRC. • Member of HNI Corporation since 2006 • 1,000 members in PRC and Hong Kong • Large direct sales force and dealer network in China with $100M revenue in 2012 • Flagship showrooms in Hong Kong, Tangxia, Shanghai, and Beijing University of Texas At Arlington http://www.uta.edu/

4. Lamex Products Desking Monarch Majesty Grande Tiper Seating Gradient Fit Pride Join me Acuity Icao Empire Rateo U2 Rondo Systems Storage Metal Casegoods   Mobile Pedestal Cabinets Central Data Storage University of Texas At Arlington http://www.uta.edu/

5. Standard Cost Definition Standard Cost Standard Cost is an estimated or predetermined cost of performing an operation or producing a good or service, under normal conditions. Standard cost includes material cost, labor cost and manufacturing overhead. University of Texas At Arlington http://www.uta.edu/ SG&A - Selling, General and Administrative Expenses

6. Material Cost Setting In Lamex, material cost is also named BOM cost. It jointly sets by product engineering, manufacture engineering and purchasing department. Product engineering is responsible for BOM structure and Quantity setting. Manufacture engineering is responsible for Utilization and/or scrap Ratio setting. Purchasing is responsible for material Unit Cost setting. Material cost = ((BOM Quantity * Utilization Ratio ) * Unit Cost) University of Texas At Arlington http://www.uta.edu/

7. Seating BOM Cost 产品编号型号顺序号 BOM层级零件号零件描述 BOM数量报废率单位总用量旧单价新单价新成本 University of Texas At Arlington http://www.uta.edu/

8. Utilization/Scrap Ratio Size: 4’x 8’ 6’x 8’ Using the historic finance data to calculate the scrap ratio. Such as painting materials. Using the computer-aided-manufacturing software to simulate the utilization ratio of particle board. Such as Haomai Cut Plan. Using the production pilot run to calculate the actual utilization ratio for fabric and leather. University of Texas At Arlington http://www.uta.edu/

9. Unit Cost Rules: • All unit cost should at least have 3 quotations. • All quotations should base on same specifications and quality. • Lowest cost should be used through negotiation, online auction, etc. • Unit of the cost is essential for calculation. • If dual-source or multiple-source strategy is applied, the highest cost of qualified supplier is used. University of Texas At Arlington http://www.uta.edu/

10. Material Cost Variations • VAVE – Value Analysis and Value Engineering • BOM structure change • Alternative material • Quantity change • PPV – Purchase Price Variance • Negotiation (cost reduction or cost adder) • Supplier changes • Long Term Agreement (LTA) • Manufacture Productivity • Manufacture process change • Utilization improvement • Scrap improvement • Scheduling and expedite cost University of Texas At Arlington http://www.uta.edu/

11. Labor Cost Labor Cost is a wage is remuneration paid by an employer to an employee (only direct workers). It may be a calculated as a fixed task based amount, or at an hourly rate, or based on an easily measured quantity of work done. It is contrasted with salaried work, which is based on a fixed time period. In Lamex, Labor Cost is calculated by Cost-Standard-Hour (CSH) and Hourly Wage by manufacture engineering and human resource department. Labor Cost = CSH * Hourly Wage University of Texas At Arlington http://www.uta.edu/

12. Cost Standard Hour - CSH Group Description Process Work Center Description CSH Type Process Time (minutes) University of Texas At Arlington http://www.uta.edu/

13. Hourly Wage Workers’ Wage: Base pay Performance based incentive and bonus Medical insurance 医疗保险 Pension insurance 养老保险 Unemployment insurance 失业保险 Work injury insurance 工伤保险 Maternity insurance 生育保险 Housing provident fund 住房公积金 Average Wage is 130%~150% to the base pay University of Texas At Arlington http://www.uta.edu/

14. Labor Cost Variations • Labor cost changes • Labor inflations • Government policies • Human market demand and supply driven • Labor productivities • Employee skill improvements • Employee performance • Manufacture process changes (non-value added eliminations) • Automation • Technology improvements • Headcount reductions University of Texas At Arlington http://www.uta.edu/

15. Manufacturing Overhead MRO - Maintenance, Repair & Operations Manufacturing overhead costs (MOH cost) are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way. Examples include supplies, indirect materials (MRO) such as lubricants, indirect manufacturing labor such as plant maintenance, cleaning, quality and warehouse labor, plant rent, plant insurance, property taxes on the plant and plant depreciation. University of Texas At Arlington http://www.uta.edu/

16. Manufacturing Overhead In-house Out source In Lamex, manufacturing overhead is calculated as: Overhead = (Material Cost + Labor Cost) / (1 – X%) X% defined as: Desking: X1% Seating: X2% Systems: X3% Storage: X4% Trading: X5% University of Texas At Arlington http://www.uta.edu/

17. Standard Cost Management Monthly P/L review for exceptional management Quarterly management review for better cost control Annual finance reset to reflect the actual cost Set process KPIs (Key-Performance-Indexes) to measure the cost management performance in monthly basis, including BOM accuracy%, VAVE$, PPV$, Productivity%, etc. Manufacture cost committee is assigned to manage the cost performance University of Texas At Arlington http://www.uta.edu/