Cost increasing evaluation
To find out the impact of it on the efficiency of the product and see the value of excess sales to achieve the same profit that was achieved before increasing the cost of the product.
The meant of increasing the cost of the product
The product is a goods or service , whether produced by the company or purchased from others and the increase of the cost of the product as a result of the high value of one of the components of this product or the high price to buy it from others which result in reducing the profitability of the product.
The objective of evaluating the increased cost of the product
1 - Knowledge of the effect of the increase in the cost of the product on the degree of efficiency of the product and therefore the special administrative constitution of The company, which is guided with on the management of the company.
2 - Knowing the extent of absorption of the sale price of the product to the increase of the cost or the company have to increase the selling price of this product.
3 - Knowing the extent of the ability of the marketing manager on marketing the excess sales value and required to be marketed to achieve the same profits , which were achieved before increasing the cost of the product.
Requirements of evaluation of increasing the cost of the product
Data entry form includes on the elements required to prepare an evaluation of the increased cost of the product on the following
In the case of the preparation of an evaluation of the increased cost of one product
1 - The value of the sale price of the product per unit
2 - The value of product cost per unit before the increase
3 - The value of product cost per unit after the increase
4 - The share of the product ( for example A ) of general and administrative expenses, including depreciation for the full year
5 - The share of the product ( for example, A) from total fixed and current assets.
6 - Choose the degree of efficiency of the preparation of the budget which is targeted to achieve (Good degree is the start point of safety - or very good degree - or high very good degree)
Example
1 - The selling price of the product ( A) = 12 pounds
2 - The cost of the product ( A) before the increase = 8 pounds
3 - the cost of the product ( A) after the increase = 10 pounds
4 - the share of the product ( for example A ) of the total general and administrative expenses including depreciation for full year , which amounted to 600,000 pounds which estimated 200,000 pounds.
5 - The share of the product ( for example, A ) total fixed and current assets which amounts to 2500000 pounds which is estimated at 833 333 pounds.
6 - The company targeted to achieve a good degree of budget.
The result of evaluating of increasing the cost of the product per unit
For the degree of efficiency of the product
The product achieved a degree of efficiency very good after the increase in the cost as the degree of efficiency of the product that declined from excellent to very good as a result of this increase, and thus change the special administrative constitution of the company which is guided on its management in terms of:
A - Quantity produced: The company needs to produce more than the quantity produced previously to achieve the same previously profit.
B - The position of the company's products from granting discounts on the sale price: Discounts can be granted on the selling price, provided that the company should be able to market the excess value of sales as a result of this discount.
C - For customer’s facilities: customer’s facilities can be given, provided that company provides liquidity without having to borrow due to increased sales volume.
D - For bank credit: It has become dependent on the company's ability to market the total value of excess sales as a result of increasing cost and credit.
E- For general expenses: Workers can be granted grants and bonuses to motivate them to increase the company's productivity.
First: Budget of good degree before increasing the cost of the product
Sales value = 912,499.86
(-)The value of purchases =608,333.24
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Gross Profit = 304,166.62
(-)Expenses= 200,000
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Net profit = 104,166.62
Second: Budget of good degree after increasing the cost of the product
Sales value = 1,824,999.74
(-)The value of purchases =1,520,833.12
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Gross Profit = 304,166.62
(-)Expenses= 200,000
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Net profit = 104,166.62
Third, the value of excess sales
1 - The value of sales after the cost increase = 1,824,999.74 pounds
2 - The value of sales before increasing the cost = ( 912,499.86 pounds )
3 - The value of increased sales as a result of the extra cost and required to be marketed to achieve the same profit before calculating the increase = 912,499.88 pounds In the case marketing manager is able to market value of this increase ( 912,499.88 pounds ) as a result of the increased cost of the product in addition to the value of sales before the increase ( 912,499.86 pounds ) then the company depends this increase the company will be forced to increase the selling price of the product.
In the case of the preparation of an evaluation of the increased cost of more than one product
1 - The sum of the prices of these products
2 - Sum of the values of the costs of these products before increasing the cost
3 - Sum of the values of the costs of these products after the cost increase
4 - Total general and administrative expenses, including depreciation for the full year for these products
5 - Total fixed and current assets for these products
6 - Choose the degree of efficiency of the preparation of the budget which targeted to achieve ( Good degree is the start point of safety - or very good degree - or high very good degree)
Example
1 - The sale price of the product ( A) = 12 pounds
The sale price of the product ( B) = 20 pounds
The sale price of the product ( C) = 26 pounds
Total prices values of company's products = 58 pounds ( enter in the data entry form )
2 - The cost of the product ( A) before the increase = 8 pounds
The cost of the product ( B) before the increase = 17 pounds
The cost of the product ( C) before the increase = 21 pounds
Total costs values of these company's products before the increase = 46 pounds
( enter in the data entry form )
3 - The cost of the product ( A) after the increase = 10 pounds
The cost of the product ( B) after the increase = 18 pounds
The cost of the product ( C) after the increase = 23 pounds
Total costs values of this company's products after the increase = 51 pounds
( enter in the data entry form )
4 - Total general and administrative expenses , including depreciation for the full year, which amounted to 600,000 pounds ( This value is included in the data entry form )
5 - Total fixed and current assets, which amounts to 2,500,000 pounds ( This value is included in the data entry form )
6 - The company targeted to achieve a budget of good degree.
Result of evaluation of the increased cost of products
For the degree of efficiency of products
The products achieved a good degree of efficiency after the cost increase where the degree of efficiency of the product declined from very good to the good as result of this increase, and thus change the special administrative constitution of company which is guided with on its management in terms of:
A - Quantity produced: the company needs to produce a large amount rather than a limited amount to achieve the same previously profit.
B - The position of the company's products from granting discounts on the sale price : Discounts can be granted on the selling price , provided that the company should be able to market the value of excess sales as a result of discount and increase the cost
C - For customers facilities: facilities can be given to customers, provided the company provides liquidity without having to borrow due to increased sales volume rather than after giving this discount without conditions
D - For bank credit : it has become dependent on the company's ability to market the total value of excess sales for each increased cost and credit.
E- for the general expenses: it must scrutinize the terms of these expenses so as not to fall in the company's wasteful
First: Budget of good degree before increasing the cost of products
Sales value = 4,410,416.66
(-)The value of purchases= 3,497,916.66
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Gross Profit = 912 500
(-) Expenses = 600000
==========
Net profit = 312500
Second: Budget of good grade after increasing the cost of products
Sales value = 7,560,714.28
(-)The value of purchases = 6,648,214.28
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Gross Profit = 912 500
(-) Expenses = 600000
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Net profit = 312500
Third: the value of excess sales
1 - The value of sales after the cost increase = 7,560,714.28 pounds
2 - The value of sales before increasing the cost = ( 4,410,416.66 pounds )
3 - The value of excess sales as a result of the extra cost and required to be market to achieve the same profit before calculating the increase= 3,150,297.62 pounds In the case of marketing manager is able to market the value of this increase ( 3,150,297.62 pounds ) as a result of the increased cost of the product in addition to the value of sales before the increase ( 4,410,416.66 pounds ) then the company depends this increase unless the company will be forced to increase the selling price of the product.