Sales Structure Analysis and Optimization Factors of the Final Result by Using Direct-Costing Method

Transcription

1 Economy Transdisciplinarity Cognition Volume 17, Issue 1/ Structure Analysis and Optimization Factors of the Final Result by Using Direct-Costing Method Gabriela FOTACHE George Bacovia University, Bacau, ROMANIA Abstract: Direct-costing method, meet information requirements of the decision making process since for any economic entity, the power to face the competition lies in its ability to adapt in a very short time to the evolution of the product price. Thus, for any economic entity, it is essential to have greater flexibility in terms of, namely: volume, assortment structure, adopting discriminatory prices for short periods of time. All these issues require the use of cost calculation methods to provide efficiently (optimal ratio between effort and effect), the information needed for decision making process. This paper presents a number of potential solutions to optimize the final result by determining and analyzing specific indicators of direct-costing method. Optimization factors considered are: increasing the physical volume of and retail assortments maintaining the same structure, reducing the physical volume of and sale, change variable costs due to labor rationalization actions and increase the sale price. Keywords: direct costing, decision-making process, sales structure, optimization Introduction The adoption of rational decisions that will achieve optimal results must take into account that the level of expenditure is permanently in a certain correlation with the volume of activity, i.e. the use of capacity and business profile. In addition to other factors that increase profits, reducing costs plays an important role. Cost level should be an ongoing concern, because, by reducing the cost, the rate of profit on the product might increase. Decision-making process involves assessing of strategies, customer satisfaction, quality, investment decisions, performance evaluation. Each of these topics invariably contains items related to costs of, planning, control and decision-making perspective. The contribution of costs in decision making is undeniable, and it is reflected in: - Choosing the optimal structure of ; - Determining the volume of activity; - Comparing the its product with the similar products made by competitors to determine differences arising from the organization of the activity; technological level; the management and training of human resources, the time management; - Creating an instrument for internal financial planning, using ex-ante costs; - Targeting potential investors on the economic efficiency of new activities or the creation of new entities; - Supporting decision makers in choosing solutions that enable the identification of ways to quickly put out the anomalies that occur. Regarded through from the of view of the decision making process, direct-costing method contributes to taking decisions, meaning that provide essential information on the optimal volume of and the optimal structure of, the contribution of each cost object in order to obtaining profit. Using direct-costing method is recommended in industrial areas, that have simultaneous, do not have stock in progress, most of the stocks of finished products often have a high rotational speed and the number of varieties is very high. 50

2 Indicators characterizing management which are calculated when applying direct costing method are: - the margin on variable costs; costs highlight the intermediate results by calculating margins, which in this case are called the margin on variable costs (mcv i ) or, at the level the entire of the (Mcv), determined as the difference between unit selling price (pv i ) or the turnover (Ca) and variable costs per unit (cv i ) or variable costs related to sold (Chv) to cover the fixed costs of the period, and earn a profit. mcv i pvi cvi Mcv Ca Chv - coverage factor (Fa) known in the literature under the name of "margin rate on variable costs" (Rmcv) as an element of optimization of the structure of, and of the sale of products, showing how many percent of the sales volume is needed to cover fixed costs and make a profit (potential profitability of the entity): Ca pr - turnover, at the level of breakeven Mcv Chf Fa x100 sau Fa x100 Ca Ca - breakeven in the two hypostases: (a) Physical breakeven or critical quantity Qpr: Chf Qpr mcv (b) breakeven in value terms, the critical turnover C a pr : Chf Ca pr Fa - overall outcome The overall outcome of the entity (R) will be determined by the formula: R i the number of products sold; qv the sold quantity; pv unit selling price; cv unit variable cost; Chf total fixed costs. n i 1 qv i pv i 51 cv i pr Chf - the fixed stock changes. determined when a part of the quantities of products (valued at the level of variable cost) obtained remain in stock, and their associated fixed costs are fully covered by the products sold. Because financial accounting inventories are valued at full cost, for the readjustment of the result it is necessary to determine a difference, to be incorporated, following a specific methodology. - dynamic safety factor or safety index (Is) meaning the relative size with which that sales can decrease, a value at which the company reaches the breakeven, beyond the area of covered losses. It is determined by the formulas: Ca Ca pr Is x100 Ca P Is x100 Mcv Direct-costing method allows determining the contribution to gross profit from and sales as illustrated below in the model as follows: contribution from = - (ChVP) contribution from sales = CBP from sales (ChVD)

3 1. Presentation of the Baseline Situation The analysis of sales is achieved by determining the most profitable combination of product sales when the company manufactures several products or offer more services. For this purpose it is necessary to calculate the contribution margin for each product and each segment of the company. In the example shown below, there are presented a number of potential solutions (at a constant level of fixed costs) to optimize the final result by determining the indicators of the direct-costing method, starting from the following initial situation: Table no. 1 Determination of the gross contribution to profit and the outcome (initial situation) Selling price per contribution unit (Q) sales White Loaf , , ,026 52,946 55,248 Dark bread ,450 42,185 21,093 7,464 13,629 Bread Nutribac ,850 11,820 6,600 2,266 2,955 White bread without salt ,360 22,360 12,298 5,143 4,919 Bread Semi ,840 42,984 21,014 7,323 14,646 Wholemeal bread ,300 89,300 58,045 20,539 10,716 Pita hypoglucidic ,760 5,694 4, Bagel ,300 32,580 26,064 3,258 3,258 Baton ,000 43,400 29,760 7,440 6,200 Bread with potatoes ,750 36,400 14,788 5,233 16,380 Graham buns ,000 33,800 24,960 6,240 2,600 Sesame buns ,600 9,490 7,446 1, Braided Bread 1Kg ,000 80,850 39,600 15,510 25,740 Buns with added fiber ,400 4,800 1, ,112 Bannock ,500 13,650 10,725 2, Baguette ,800 34,800 20,184 5,568 9,048 Pita ,200 5,890 4,154 1, Tiger Bread ,560 35,856 14,874 6,109 14,874 Graham bread sliced ,640 26,544 7,963 6,067 12,514 Sliced toast ,800 89,640 35,856 23,904 29,880 Superior sliced bread ,600 62,920 21,164 13,728 28,028 Sliced diet bread ,400 18,600 8,432 5,952 4,216 Sliced tray bread ,300 50,505 27,573 13,104 9,828 Seeds sliced bread ,300 19,530 9,765 4,464 5,301 Sliced rye bread ,800 24,500 11,662 4,704 8,134 Graham toast ,600 32,480 14,036 5,568 12,876 Multigrain toast ,200 20,880 9,432 3,456 7,992 Total 925,510 1,144, , , ,832 Total fixed costs (Chf) 174,776 Profit 128,056 Contribution margin (Cbu) = CBP/Q Breakeven = Chf/Cbu 104, Determining the coverage factor and the turnover at the level of breakeven for each product and the total. Table no. 2 Determination of the coverage factor (initial situation) 52 White Loaf ,997 28,597 Dark bread ,665 4,764 Bread Nutribac ,112 1,335 White bread without salt ,525 2,525

4 Bread Semi ,596 4,854 Wholemeal bread ,085 10,085 Pita hypoglucidic Bagel ,132 3,679 Baton ,578 6,005 Bread with potatoes Graham buns ,872 3,817 Sesame buns ,649 1,072 Braided Bread 1Kg ,727 9,131 Buns with added fiber Bannock ,202 1,542 Baguette ,930 3,930 Pita Tiger Bread ,999 4,049 Graham bread sliced ,427 2,998 Sliced toast ,624 10,123 Superior sliced bread ,230 7,106 Sliced diet bread 0, ,400 2,101 Sliced tray bread ,083 5,704 Seeds sliced bread ,050 2,206 Sliced rye bread ,107 2,767 Graham toast ,310 3,668 Multigrain toast ,358 Total ,264 The safety index obtained is 42.29%. Thus, in the initial situation, to reach at the level of equilibrium, sales may decrease by 1,018, Determination of the Influence of Optimization Factors The first optimization factor considered consists of (I) increasing the physical volume of and sale by 15%, while maintaining the same structure of assortment. Tabel no. 3 Determination of the gross contribution to profit and the outcome (I) Selling price per unit (Q) 53 sales contribution White Loaf , , ,780 60,888 63,535 Dark bread ,318 48,513 24,256 8,583 15,673 Bread Nutribac ,328 13,593 7,589 2,605 3,398 White bread without salt ,714 25,714 14,143 5,914 5,657 Bread Semi ,616 49,432 24,167 8,422 16,843 Wholemeal bread , ,695 66,752 23,620 12,323 Pita hypoglucidic ,074 6,548 4, Bagel ,445 37,467 29,974 3,747 3,747 Baton ,300 49,910 34,224 8,556 7,130 Bread with potatoes ,163 41,860 17,006 6,017 18,837 Graham buns ,800 38,870 28,704 7,176 2,990 Sesame buns ,790 10,914 8,563 2, Braided Bread 1Kg ,950 92,978 45,540 17,837 29,601 Buns with added fiber ,360 5,520 2, ,429 Bannock ,425 15,698 12,334 2, Baguette ,020 40,020 23,212 6,403 10,405

5 Selling price per unit (Q) sales contribution Pita ,130 6,774 4,777 1, Tiger Bread ,544 41,234 17,105 7,025 17,105 Graham bread sliced ,536 30,526 9,158 6,977 14,391 Sliced toast , ,086 41,234 27,490 34,362 Superior sliced bread ,890 72,358 24,339 15,787 32,232 Sliced diet bread 0, ,260 21,390 9,697 6,845 4,848 Sliced tray bread ,395 58,081 31,709 15,070 11,302 Seeds sliced bread ,695 22,460 11,230 5,134 6,096 Sliced rye bread ,270 28,175 13,411 5,410 9,354 Graham toast ,340 37,352 16,141 6,403 14,807 Multigrain toast ,280 24,012 10,847 3,974 9,191 Total 1,064,337 1,316, , , ,257 Fixed Costs Total 174,776 Profit Total 173,481 It is obtained, in this case a total profit of 173,481 lei, increasing by 35.47% compared to the profit obtained in the initial stage, although sales increased by 15%. This difference arising from a better coverage of fixed costs by increasing the physical volume of and sale. It is determined the coverage factor and the turnover at the level of the breakeven for each product and for total sales. Table no. 4 Determination of the coverage factor (I) 54 White Loaf ,997 28,597 Dark bread ,665 4,764 Bread Nutribac ,112 1,335 White bread without salt ,525 2,525 Bread Semi ,596 4,854 Wholemeal bread ,085 10,085 Pita hypoglucidic Bagel ,132 3,679 Baton ,621 8,135 Bread with potatoes Graham buns ,872 3,817 Sesame buns ,649 1,072 Braided Bread 1Kg ,727 9,131 Buns with added fiber Bannock ,202 1,542 Baguette ,930 3,930 Pita Tiger Bread ,999 4,049 Graham bread sliced ,427 2,998 Sliced toast ,624 10,123 Superior sliced bread ,230 7,106 Sliced diet bread 0, ,400 2,101 Sliced tray bread ,083 5,704 Seeds sliced bread ,050 2,206 Sliced rye bread ,107 2,767 Graham toast ,310 3,668 Multigrain toast ,358 Total ,394

6 Following the calculations, there results a safety index of 49.81% compared to 42.29% in the initial situation. Thus, if the first optimization factor, namely the and sales, increase by 15%, the turnover at the level of breakeven is 128,394 lei with a safety interval of 1,187, lei. The second optimization factor is considered the (II) reducing of physical volume of and sale by 4%, while maintaining the same structure of assortment. Table no. 5 Determination of the gross contribution to profit and the outcome (II) Selling price per unit (Q) sales 55 contribution White Loaf , , ,225 50,828 53,038 Dark bread ,152 40,498 20,249 7,165 13,084 Bread Nutribac ,456 11,347 6,336 2,175 2,837 White bread without salt ,466 21,466 11,806 4,937 4,722 Bread Semi ,566 41,265 20,174 7,030 14,061 Wholemeal bread ,728 85,728 55,723 19,717 10,287 Pita hypoglucidic ,410 5,466 4, Bagel ,128 31,277 25,021 3,128 3,128 Baton ,520 41,664 28,570 7,142 5,952 Bread with potatoes ,840 34,944 14,196 5,023 15,725 Graham buns ,920 32,448 23,962 5,990 2,496 Sesame buns ,016 9,110 7,148 1, Braided Bread 1Kg ,680 77,616 38,016 14,890 24,710 Buns with added fiber ,144 4,608 1, ,028 Bannock ,720 13,104 10,296 2, Baguette ,408 33,408 19,377 5,345 8,686 Pita ,952 5,654 3,988 1, Tiger Bread ,498 34,422 14,279 5,864 14,279 Graham bread sliced ,134 25,482 7,645 5,825 12,013 Sliced toast ,808 86,054 34,422 22,948 28,685 Superior sliced bread ,456 60,403 20,317 13,179 26,907 Sliced diet bread 0, ,904 17,856 8,095 5,714 4,047 Sliced tray bread ,208 48,485 26,470 12,580 9,435 Seeds sliced bread ,928 18,749 9,374 4,285 5,089 Sliced rye bread ,408 23,520 11,196 4,516 7,809 Graham toast ,136 31,181 13,475 5,345 12,361 Multigrain toast ,912 20,045 9,055 3,318 7,672 Total 888,490 1,098, , , ,719 Fixed Costs Total 174,776 Profit Total 115,943 It is obtained, in this case, a total profit of 115,943 lei decreasing by 12,113 compared to the profit obtained in the baseline situation 9.46%, though sales fell by only 4%. This difference results from a distribution of constant fixed costs, over a smaller physical volume of and sale. It is determined the coverage factor and the turnover at the level of the breakeven for each product and for total sales. Table no. 6 Determination of the coverage factor (II) White Loaf ,997 28,597 Dark bread ,665 4,764 Bread Nutribac ,112 1,335 White bread without salt ,525 2,525 Bread Semi ,596 4,854

7 Wholemeal bread ,085 10,085 Pita hypoglucidic Bagel ,132 3,679 Baton ,767 5,437 Bread with potatoes Graham buns ,872 3,817 Sesame buns ,649 1,072 Braided Bread 1Kg ,727 9,131 Buns with added fiber Bannock ,202 1,542 Baguette ,930 3,930 Pita Tiger Bread ,999 4,049 Graham bread sliced ,427 2,998 Sliced toast ,624 10,123 Superior sliced bread ,230 7,106 Sliced diet bread 0, ,400 2,101 Sliced tray bread ,083 5,704 Seeds sliced bread ,050 2,206 Sliced rye bread ,107 2,767 Graham toast ,310 3,668 Multigrain toast ,358 Total ,696 It follows a coverage factor of 26.46% and a safety index of 39.88%. (III) Changing the variable costs as a result of rationalizing labour actions by 1.2% Table no. 7 Determination of the gross contribution to profit and the outcome (III) Selling price per unit (Q) sales contributio n White Loaf , , ,985 52,946 57,289 Dark bread ,450 42,185 20,805 7,464 13,917 Bread Nutribac ,850 11,820 6,464 2,266 3,090 White bread without salt ,360 22,360 12,100 5,143 5,117 Bread Semi ,840 42,984 20,732 7,323 14,929 Wholemeal bread ,300 89,300 57,253 20,539 11,508 Pita hypoglucidic ,760 5,694 4, Bagel ,300 32,580 25,486 3,258 3,836 Baton ,000 43,400 29,210 7,440 6,750 Bread with potatoes ,750 36,400 14,566 5,233 16,602 Graham buns ,000 33,800 24,476 6,240 3,084 Sesame buns ,600 9,490 7,291 1, Braided Bread 1Kg ,000 80,850 38,649 15,510 26,691 Buns with added fiber ,400 4,800 1, ,146 Bannock ,500 13,650 10,483 2, Baguette ,800 34,800 19,906 5,568 9,326 Pita ,200 5,890 4,088 1, Tiger Bread ,560 35,856 14,638 6,109 15,109 Graham bread sliced ,640 26,544 7,767 6,067 12,710 Sliced toast ,800 89,640 35,083 23,904 30,653 56

8 Selling price per unit (Q) sales contributio n Superior sliced bread ,600 62,920 20,720 13,728 28,472 Sliced diet bread 0, ,400 18,600 8,240 5,952 4,408 Sliced tray bread ,300 50,505 27,016 13,104 10,385 Seeds sliced bread ,300 19,530 9,579 4,464 5,487 Sliced rye bread ,800 24,500 11,467 4,704 8,329 Graham toast ,600 32,480 13,805 5,568 13,107 Multigrain toast ,200 20,880 9,279 3,456 8,145 Total 925,510 1,144, , , ,360 Fixed Costs Total 174,776 Profit total 138,584 It is noted that although the total turnover does not change, the profit increased to 138,584 lei, which is explained by the reduction of variable costs. Table no. 8 Determination of the coverage factor (III) White Loaf ,124 27,636 Dark bread ,542 4,604 Bread Nutribac ,075 1,290 White bread without salt ,440 2,440 Bread Semi ,475 4,691 Wholemeal bread ,746 9,746 Pita hypoglucidic Bagel ,926 3,556 Baton ,284 6,499 Bread with potatoes Graham buns ,675 3,689 Sesame buns ,593 1,036 Braided Bread 1Kg ,602 8,824 Buns with added fiber Bannock ,128 1,490 Baguette ,798 3,798 Pita Tiger Bread ,899 3,913 Graham bread sliced ,380 2,897 Sliced toast ,435 9,783 Superior sliced bread ,121 6,867 Sliced diet bread 0, ,353 2,030 Sliced tray bread ,979 5,512 Seeds sliced bread ,015 2,131 Sliced rye bread ,070 2,674 Graham toast ,266 3,545 Multigrain toast ,279 Total ,717 Following the calculations, there results a safety index of 44.23% compared to 42.29% in the initial situation. Thus, for the third optimization factor of reducing variable costs the turnover at the breakeven is 105,870 lei, with a safety interval of 1,021,

9 IV: Increasing the selling price by 0.5% Table no. 9 Determination of the gross contribution to profit and the outcome (IV) Selling price per unit (Q) 58 sales contributio n White Loaf , , ,026 52,946 56,514 Dark bread ,450 42,396 21,093 7,464 13,840 Bread Nutribac ,850 11,879 6,600 2,266 3,014 White bread without salt ,360 22,472 12,298 5,143 5,031 Bread Semi ,840 43,199 21,014 7,323 14,861 Wholemeal bread ,300 89,747 58,045 20,539 11,163 Pita hypoglucidic ,760 5,722 4, Bagel ,300 32,743 26,064 3,258 3,421 Baton ,000 43,617 29,760 7,440 6,417 Bread with potatoes ,750 36,582 14,788 5,233 16,562 Graham buns ,000 33,969 24,960 6,240 2,769 Sesame buns ,600 9,537 7,446 1, Braided Bread 1Kg ,000 81,254 39,600 15,510 26,144 Buns with added fiber ,400 4,824 1, ,136 Bannock ,500 13,718 10,725 2, Baguette ,800 34,974 20,184 5,568 9,222 Pita ,200 5,919 4,154 1, Tiger Bread ,560 36,035 14,874 6,109 15,053 Graham bread sliced ,640 26,677 7,963 6,067 12,646 Sliced toast ,800 90,088 35,856 23,904 30,328 Superior sliced bread ,600 63,235 21,164 13,728 28,343 Sliced diet bread 0, ,400 18,693 8,432 5,952 4,309 Sliced tray bread ,300 50,758 27,573 13,104 10,081 Seeds sliced bread ,300 19,628 9,765 4,464 5,399 Sliced rye bread ,800 24,623 11,662 4,704 8,257 Graham toast ,600 32,642 14,036 5,568 13,038 Multigrain toast ,200 20,984 9,432 3,456 8,096 Total 925,510 1,150, , , ,555 Fixed Costs Total 174,776 Profit total 133,779 It is obtained in this case a total profit of 133,779 lei. It is determined the coverage factor and the turnover at the level of the breakeven for each product and for total sales. Table no. 10 Determination of the coverage factor (IV) White Loaf , , Dark bread , , Bread Nutribac , , White bread without salt , , Bread Semi , , Wholemeal bread , , Pita hypoglucidic Bagel , , Baton , , Bread with potatoes

10 Graham buns , , Sesame buns , , Braided Bread 1Kg , , Buns with added fiber Bannock , , Baguette , , Pita Tiger Bread , , Graham bread sliced , , Sliced toast , , Superior sliced bread , , Sliced diet bread 0, , , Sliced tray bread , , Seeds sliced bread , , Sliced rye bread , , Graham toast , , Multigrain toast , Total , Following the calculations, there results a safety index of 43.36% compared to 42.29% in the initial situation. Thus, if the fourth optimization factor, i.e. increasing the sales price, the turnover at the breakeven is 124,923 lei with a safety interval of 1,025, lei. Conclusions Synthesis of data obtained by determining the influence of optimization factors taking into consideration is shown in the table below. Table no. 11 Synthesis of optimization results Optimization factors sales contribution Total profit Breakeven Dynamic safety coefficient Initial situation 1,144, , , , % 128, , % I 1,316, , , , % 173, , % II 1,098, , , , % 115, , % III 1,144, , , , % 138, , % IV 1,150, , , , % 129, , % A reduction of variable costs with a certain percentage as a result of an redesign products action, will determine an additional profit equal with the quantity sold multiplied with that reducing of variable costs. As a result, the coverage factor increases, the breakeven will move down to the of origin, corresponding to the volume of sales. 59

11 Figure no 1. Evolution of the main indicators of direct-costing method depending on the solution of optimization An increase in the selling price by a certain percentage or a certain amount would lead to an additional profit equal to the quantity sold multiplied by that price increase. In this way, the coverage factor increases, the breakeven is found to a certain volume of sales, so it will move down to the of origin and the safety index will increase. All companies that try to maximize profits discover that output and sales volume are limited. For many of them, the demand for their products is the limiting factor, and therefore the company will try to get maximum profit concentrating sales efforts on those products that bring large contributions. There are other limiting factors that impede business development, such as space, capacity, human resources and materials. In these cases it is important for the company to obtain the maximum profit concentrating on products with a high contribution of the limitative factors incorporated. In the long term, the management should try to eliminate the limitative factor (e.g. recruitment of new staff). Thus, any limitative factor should be only a short-term problem. However, at the time of his removal, he will be replaced by a new limitative factor. Even in the short term, the management can find solutions. Sometimes it is difficult to identify a limitative factor. In practice, several factors can operate at the same time. Supplementary recommended readings Davila, A. & Wouters, M., (2004), Designing cost-competitive technology products through cost management. Accounting Horizons. 18 (1), p Levant, Z., Zimnovitch, H., (2013), Contemporary evolutions in costing methods: Understanding these trends through the use of equivalence methods in France, Accounting History, vol. 18, 1: p Moore, F.C., (2012), Costing Adaptation: Revealing Tensions in the Normative Basis of Adaptation Policy in Adaptation Cost Estimates, Science, Technology & Human Values, vol. 37, 2: p Putra, L.D., (2010), Advantages and Disadvantages of Direct Costing, February, available at: 60