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Supply Chain and Logistics

Supply Chain and Logistics Definition

A supply chain is a network of businesses and activities that takes a product from raw material suppliers to end consumers. By definition, logistics refers to the processes of acquiring, transporting, and storing resources along the supply chain and logistics. A supply chain, which relies heavily on information technology, logistics and transportation, may involve numerous different businesses that comprise the various links along the supply chain, or a single company may oversee the majority of the supply chain and logistics for its products.

For example, a supply chain for coffee may begin with Central American farmers. The product (coffee) would then move along the supply chain from the farmers to the facilities that process. Then, they package the coffee beans. Then, they would move to distributors that transport the product to wholesalers. These wholesalers might then deliver the product to retailers and neighborhood coffee shops for sale to end customers.

In this example, the supply chain and logistics would be the entire network of businesses that carry the product from its source – the coffee farmers in Central America – to where the finished product is consumed by customers at the neighborhood coffee shop.

Supply Chain and Logistics Activities

Consider supply chain business processes vertical systems. A typical supply chain consists of manufacturers, wholesalers, distributors, and retailers. A supply chain can be seen as a system connecting the value chains of the companies within that system. Consider the activities closest to the source of raw materials upstream activities. Then consider the activities closest to the finished product and the end consumer downstream activities. A company is considered upstream or downstream in relation to other companies in the supply chain depending on its relative position in the supply chain network.

Supply Chain Links

A company will typically participate in a supply chain business process at the point where it can employ its particular functional area of expertise. For example, a trucking company will focus on the transport link of a supply chain, while a mining company will focus on finding and extracting raw natural resources, and retailers will focus on selling the end product to consumers.

Because you can specialize each supply chain link in its own functional area, they may not know about the links directly upstream and downstream from them. That’s why supply chain communication and supply chain coordination, both of which require reliable information technology systems across different businesses, are vitally important to the functioning of a supply chain.

If, however, one link in the supply chain process feels it can expand its responsibilities in the network, either because it can complete a process more efficiently or at a lower cost, then that company can become vertically integrated, by forward integrating or backward integrating. A company that takes over a downstream activity from a customer is forward integrating. In comparison, a company that takes over an upstream activity from a supplier is backward integrating. A company that oversees several consecutive links in the supply chain of its product is vertically integrated.

Supply Chain Management

Supply chain management refers to the process of overseeing and optimizing the overall supply chain network from raw material suppliers to finished product retailers. The goal of supply chain management is to make the supply chain process as efficient as possible by enhancing product and information flows among participating businesses.

Improving your supply chain can involve supply chain communication, or enhance the flow of information among businesses along the supply chain. Furthermore, the logistics and transportation systems will run optimally. But this only happens if all members of the chain have access to all relevant market data and operations information. All other members of the chain provide this information.

Supply chain improvement can also involve supply chain coordination, or optimizing the logistics and transportation activities for maximum efficiency. This may include the following:

  • Improving information flows and inter-business communication
  • Optimizing manufacturing processes
  • Implementing just in time (JIT) production systems
  • Optimizing vehicle distribution routes
  • Eliminating bottlenecks in the process
  • Allocating resources to maximize efficiency

An efficient and optimized supply chain can benefit all the businesses in the supply chain. Therefore, it adds value to the end consumer.

If you want to check if your unit economics are sound, then download your free guide here.

supply chain and logistics, Supply Chain Management

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supply chain and logistics, Supply Chain Management

See Also:
Supply and Demand Elasticity
How to Manage Inventory
Perpetual Inventory System
Days Inventory Outstanding Analysis
Inventory Turnover Ratio Analysis

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Standard Costing Example

See Also:
Standard Costing System

Standard Costing Example

Here is a simple standard costing example. Let’s take a company that makes widgets. Based on historical data, a cost analyst determines that producing one widget typically requires 1 pound of raw material costing $2 dollars and 1 hour of labor costing $20 dollars. These are the standard amounts and costs for material and labor.

The company expects to produce 1,000 widgets in the upcoming quarter. Based on this sales forecast, and using the standards determined by the cost analyst, the company can plan a budget for the production costs required for the upcoming quarter. The budget includes 1,000 pounds of raw material costing $2,000 dollars and 1,000 hours of labor costing a total of $20,000 dollars. So the total production costs for the upcoming quarter are expected to be $22,000 dollars.

At the end of the quarter, the company analyzes the production process to see how well they stuck to the budget. As it turns out, the company produced 1,000 widgets at a total cost of $35,000 dollars. Clearly, the production process turned out to be more expensive than they had planned. The cost analyst can then compare the standard budgeted costs to the actual costs to see what the differences were and then the managers can analyze the production process to find out why the differences occurred.

Conclusion

Let’s say, as it turns out, the company actually used 1,000 pounds of raw material costing $2,000 dollars and 1,000 hours of labor costing $33,000 dollars. Clearly the variance occurred in the pay rate. For some reason, the labor ended up costing $13,000 dollars more than they had planned. Maybe this is because the original estimates were off. Or maybe some of the workers were working on overtime. Or maybe somebody made a mistake. By comparing the standard cost and the actual costs the company can analyze the situation. Then they can dig deeper to find out what went wrong.

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standard costing example

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Product Costs vs Period Costs

See Also:
Product Pricing Strategies

Product Costs vs Period Costs

In accounting, all costs incurred by a company can be categorized as either product costs or period costs. The two types of costs are recorded differently.

Product costs are applied to the products the company produces and sells. Product costs refer to all costs incurred to obtain or produce the end-products. Examples of product costs include the cost of raw materials, direct labor, and overhead. Before the products are sold, these costs are recorded in inventory accounts on the balance sheet. They are treated like assets. Product costs are sometimes referred to as “inventoriable costs.” When the products are sold, these costs are expensed as costs of goods sold on the income statement.

Period costs are the costs that cannot be directly linked to the production of end-products. Essentially, a period cost is any cost that is not a product cost. Examples of period costs include sales costs and administrative costs. Period costs are always expensed on the income statement during the period in which they are incurred.

In sum, product costs are inventoried on the balance sheet before being expensed on the income statement. Period costs are just expensed on the income statement.

Product Costs vs Period Costs

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Product Costs

See Also:
Economic Production Run (EPR)
Product Pricing Strategies
Bank Charge
Completed Production Method
Inventory Shrinkage

Product Costs Definition

Define product costs as the total costs of creating products, is an essential factor in the success of a manufacturing business. Some of these components include all direct costs, from raw materials to labor and even transportation, included in creating a finished product ready for sale.

Product Cost Explanation

Explain product cost as the entire cost spectrum for a product, can have varying levels of complexity. The product cost concept will vary greatly depending on the type of product produced.

For a simple injection-molded plastic product, product cost per unit will include raw plastics, transportation from the raw material maker to the manufacturing plant, labor, energy used by manufacturing machines, and more.

For a software product maker, a product cost breakdown will include development labor, energy, and any other costs directly associated with making the piece of software.

Any business which makes products has a product cost. To assure efficient and profitable systems it is in the best interest of the business owner to monitor these costs. From this information a company can solve internal problems and ultimately increase the company’s bottom line (Revenue – Costs = Profit).

Product Costs Formula

No single product cost formula seems to exist. More, it is the combination of all of the costs which add up to create a product. This can widely vary based on industry, production method, and more.

An industry average may be available to perform product cost analysis as compared to standard practices. This way, a company can see if they are meeting common standards. From here a company can attempt to become more efficient than the industry standard by enacting some best practices.

Product Cost Example

Sterling is the owner of a web development company. Though he works with intangible assets, mostly, he still has a product cost equation. His product cost effects his bottom line as much as any manufacturing firm.

On average, Sterling charges clients $10,000 for a perfect web application which is ready to be deployed. In comparison, it usually costs him about $3,000 to create one of these applications. Sterling would like to reduce this in order to increase company profits.

Sterling looks at his main factor: labor. By hiring better developers Sterling will slightly increase labor costs but also expects the developer to produce 10% more in one hour than his current employees.

On the other hand, by purchasing new development software Sterling expects to also increase average worker productivity by 10%.

Choosing An Option

In this example, Sterling will choose an option based on his preferences. Rather than interviewing an entire new team he opts for the new system. This way he will not have to waste time, energy, and create a hassle for his current employees. He chooses this option after speaking with his CFO, who informs him that the cost of the new system will be virtually the same as the cost of hiring new employees. Specifically, the software will cost a total of $160,000. He will have to spend $159,500 on project manager time, new employee training, and processing.

Sterling is confident that he has made the right decision. He looks forward to his new software and the happy faces of the employees he appreciates.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Product Costs

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Product Costs

 

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Inventoriable Costs

See also:
Just in Time Inventory System
Perpetual Inventory System
Inventory Turnover Ratio Analysis
Days Inventory Outstanding
LIFO vs FIFO

Inventoriable Costs

In accounting, inventoriable costs refer to all costs incurred to obtain or produce the end-products. Apply these costs to the products the company produces and sells. The cost of raw materials, direct labor, and part of overhead are all examples.

Before the products are sold, these costs are recorded in inventory accounts on the balance sheet and are treated like assets. You can also use product costs instead. When the products are sold, expense these costs as costs of goods sold on the income statement.

In sum, these costs are inventoried on the balance sheet. This occurs before being expensed on the income statement. Compare inventoriable costs, or product costs, to period costs. They are not directly linked to production. They are expensed in the period in which they are incurred.

If you want to check whether your unit economics are sound, then download your free guide here.

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Current Expenditures

Current Expenditures Definition

Current expenditures refer to short-term spending that is fully expensed in the fiscal period in which it is incurred. They are in contrast to capital expenditures, which refer to spending on long-term assets that are capitalized and amortized over their useful life. Examples of this type of expenditure include wages, salaries, raw material costs, and administrative expenses.

Accounting Treatment

In accounting, treat current expenditures like other short-term expenses. Fully expense them during the fiscal period they incur. Unlike capital expenditures, which are first recorded on the balance sheet as assets before hitting the income statement as amortization expenses, record current expenditures directly on the income statement as expenses in the current fiscal period. Basically, if the capital outlay is invested in an asset that will last longer than one year, then consider it a capital expenditure and treat it accordingly. On the other hand, if the capital outlay is invested in an asset that will last less than one year, then consider it a current expenditure.


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current expenditures

 

current expenditures

See Also:
Double Entry Bookkeeping
Indirect Labor
Indirect Materials
Lease Agreements
Net Operating Loss Carryback and Carryforward

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Capitalization

See Also:
Company Life Cycle
Market Positioning
Insider Trading
Dispersion
Adjusted Present Value (APV) Method of Valuation
Capitalization Rate

Capitalization in Finance

In finance, capitalization in finance is the sum of a company’s debt and equity. It represents the capital invested in the company, including bonds and stocks.

Capitalization can also mean market capitalization. Market capitalization is the value of a company’s outstanding shares of stock. It also represents the value of the firm according to investors’ perceptions. It is equal to the number of shares outstanding multiplied by the share price.

Market Capitalization = Shares Outstanding x Share Price


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Capitalization in Accounting

In accounting, capitalization refers to recording costs as assets on the balance sheet instead of as expenses on the income statement. A company may record the purchase price of an asset, as well as the asset’s acquisition costs, such as transportation and setup, as assets on the balance sheet.

Capitalization in accounting also refers to transferring an off-balance-sheet operating lease onto the balance sheet and recording it as a capital lease. To do this, calculate the present value of the future operating lease payments and record the amount on the balance sheet as an asset with a corresponding liability.

Capitalization of Cost

For example, a manufacturing company may record the cost of raw materials, direct labor, and overhead as assets – where labor and overhead would be capitalized costs. The assets (including the capitalized costs) are then transferred to the income statement as costs of goods sold as the underlying assets are sold to customers. Capitalizing costs increases the value of total assets and equity on the balance sheet, as well as net income on the income statement.

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Capitalization in Finance, Capitalization in Accounting

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Capitalization in Finance, Capitalization in Accounting

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