Methods and Scope of Fixed Costs

The basic methods of strategic cost management are value chain analysis, competitor analysis, strategic cost driver analysis and so on. Do not blindly seek large and advanced in fixed asset investment, under the premise of ensuring scientific and reasonable, control the fixed asset investment cost within the minimum range, reduce the share of fixed cost in the total cost, and increase the proportion of contribution to profit. Realize the cost-driven investment scale and gain cost advantage. For example:

(1) Consider every tiny aspect of new investment. For every investment in a new automobile production plant of the same size around the world, Toyota Motor Corp. invests at least 10% less than it did in its previous plant, so that in 2002, Toyota's gross profit margin was the highest in the global automobile industry, at 8.5%; GM's was only 1.5%. In designing the new plant, Toyota comprehensively considered every aspect that needed to be 'spent ', including plant, equipment, production processes, and layout. Especially the logistics, from raw materials to finished products, each link adopts scientific design to save time and efficiency. According to statistics, a screw in one of Toyota's automobile factories was carried 25 kilometers in the factory from purchasing into the factory to the product leaving the factory after assembly.

(2) in terms of investment in equipment, there is no need to pursue the so-called reputation, as long as appropriate, can be used domestically imported. For example: a private paint company's equipment from the domestic procurement of a set spent 2 million yuan, while a listed company from abroad to purchase a set of the same size of equipment but spent 11 million yuan. Isn't this a joke on shareholders' money?

(3) equipment function to applicable prevail, not the pursuit of surplus function and luxury. For example: the electrical control system of cement production equipment, should be able to adapt to the high temperature dust environment, low failure rate, easy to operate as the main function. The same daily output of 1,000 tons of cement production line, Gansu, a company invested 70 million yuan to buy equipment, while a company in Shaanxi has invested 13,000 million yuan, the electrical control system partially used in the U.S. space shuttle technology. Imagine, in a cement production enterprises, useful to the space control so cutting-edge technology necessary?

(4) imported equipment to mature and easy to grasp the operation of the main, and the company's own engineers, technicians, workers, the actual level of control combined, it is not appropriate to choose the most advanced, has not been popularized by the new equipment. There are countless cases of failure in this regard. A beverage company to buy the most advanced foreign equipment, due to the operation of technical difficulties, the enterprise spent nearly two years for debugging, and ultimately did not reach its design capacity.

(5) Is the plant to choose steel mixed brick structure, or steel structure? Or even the light steel structure of the steel structure? Enterprises can adopt the most appropriate proportion of steel structure through rational design, after feasibility study, to reduce the amount of steel, thereby reducing the amount of investment.

(6) Reasonable use of fixed asset leasing business. Whether short-term use or long-term use, plant and equipment can take the form of leasing, especially the use of inefficient equipment. For example: equipment for large-scale engineering and construction is commonly used in the form of leasing. Hong Kong and Taiwan businessmen have leased a large number of used engineering machinery and equipment for use on the mainland and in Thailand after the completion of the construction of Taiwan's high-speed railroad and Hong Kong's airport. This is a very normal phenomenon in the more developed regions.

(7) Timely disposal of idle corporate assets is also necessary. This may result in a one-time loss in the present, but it can result in cash recovery for the business, increase operating cash flow, and reduce depreciation in the future.

(8) In addition, investment in the establishment of large-scale factories can be based on the need to put funds in place gradually, there is no need to invest all at once. Because investment projects are prone to form sunk costs, once the project is established and investment is completed, there is no turning back again and again. And the capital investment in stages, there is the possibility of regular review, to ensure that no possible losses or to minimize the losses that have occurred. Such as the U.S. Chrysler Automobile Company's automobile parts and components of the self-production rate of only 35%, the rest are supporting the masses (OEM).

Domestic Mengniu Dairy is a typical example of asset-light structure. Mengniu started from scratch, and after four years, sales revenue reached more than 2 billion. Their approach is to invest limited funds in key equipment related to the core technology; and for its supporting the need for more than 500 cars are all by the supporting business of their own investment, the farmers need to raise cattle all the assets are also invested by the farmers themselves; enterprises do not have a larger burden, so as to obtain a faster development than competitors in the same industry.

From the perspective of fixed asset investment, the corresponding strategic management indicators that the enterprise needs to consider include: the relationship between business and scale, the degree of integration of internal and external resources, the cost reduction indicators brought about by learning, geographic location selection indicators, and supplier management indicators. As we all know, in the cost structure, the greater the proportion of fixed costs, the greater the impact of the efficiency of the use of fixed assets on the unit manufacturing costs. For example, the ratio of fixed cost to variable cost in the automobile and parts industry is about 10:90; the ratio of fixed cost to variable cost in the iron and steel, cement, garden machinery, tomato food, sugar and other industries is about 20:80; the ratio of fixed cost to variable cost in the fruit juice beverage is about 52:48; and the ratio of fixed cost to variable cost in the tap water industry is about 98:2. The higher the utilization rate of fixed assets and the faster the turnover, the more profitable the company will be.

There is an example of a small steel company that is very profitable despite its outdated equipment. After the study found that the actual output of the enterprise more than 2.2 times the design capacity, that is to say, this enterprise one set of equipment production than other steel enterprises two sets of equipment production is more, which is tantamount to saving a set of equipment investment. The average fixed cost and variable cost ratio of steel enterprises is about 20:80, while this enterprise is 11:89, the unit manufacturing cost is lower than the industry average of 90 yuan / ton, and this contribution is mainly from the enterprise to the management of fixed assets.

Another example: the production of tomato paste, sugar and other products is very seasonal, only 2-3 months of the year the production period, at other times the equipment is idle. However, through research and development, cultivate early or late ripening tomato varieties, 10 days ahead of the start or extend the end of 10 days of production, you can increase the production of tomato paste about 14,000 tons, per ton of tomato paste due to the depreciation of fixed assets to reduce the cost of about 10 yuan, then 300,000 tons of production can reduce the cost of about 3 million yuan. In addition to idle equipment can be reused through a variety of ways, relying on the flexibility of production equipment can also improve the utilization of equipment. Shanghai General Motors sedan assembly line is flexible, Buick Junwei series, Saio series, GL8 business car series, as well as the new car Kaiyue series can be assembled on the same assembly line.

And then, for example, through the simulation of a small auto parts company, under the existing conditions remain unchanged, the total assets (including fixed assets and current assets) turnover rate to speed up, the growth rate of profits will be faster.

From the point of view of improving the efficiency of fixed asset use, the corresponding strategic management indicators that enterprises need to consider include: indicators of production capacity utilization pattern, indicators of internal organizational efficiency, indicators of product development and so on. In fact, it is difficult to analyze and account for fixed costs from the strategic management aspect. Most of the traditional fixed costs are analyzed by cost-volume-profit and break-even methods, and the data are inaccurate, which is the reason why the management accounting methods are less applied in practice.

Fixed costs (expenses) do not only refer to depreciation, because fixed costs in the country is included in the indirect cost accounts, traditional cost accounting, often according to the production volume was calculated by apportionment. Some equipment, even if not in use, its depreciation is amortized in the product cost, which is exactly the truth of the actual cost of the product, and therefore easy to be ignored, so that managers are negligent. This shortcoming can be remedied if the job costing method is used to allocate the actual cost to the actual behavior or operation according to the equipment's machine hours and labor.

For example, the efficiency of an agricultural machinery manufacturer has been declining year after year, with serious losses. According to the traditional accounting analysis, like most of the reasons for business losses: market downturn, competition is too fierce, raw material prices, 9/11, SARS, Iraq war and so on. But after the attributes of manufacturing costs are re-approved using job costing, the truth is revealed.

Originally, the fundamental problem of this enterprise is the irrational product structure, equipment utilization is too low, production replacement is too frequent, production lead time is long, the output of a single product is small, and the product value is low, low labor productivity and can not make up for the relatively high fixed costs, the essence of its products is the developed countries to the developing countries to transfer the production of the first product.

From the perspective of fixed costs in the production chain, enterprises need to consider the corresponding strategic management indicators, including the output rate indicators, unplanned downtime indicators, machine time occupancy rate indicators, production lead time and manpower, product qualification rate indicators, procurement of quality qualification rate and supply of timely rate indicators.

Fixed costs are costs that are incurred by a company at a given time even when production is zero. Total fixed costs are made up of contractual expenses such as interest expense, mortgage expense, and manager's fees.

Fixed costs are those costs that are fixed in the aggregate over a period of time, but whose allocation to a unit of output changes as output changes.