Extended Cost and Full Cost
1. Extended Cost and Full Cost
In this video, I will introduce the concepts of extended cost and full cost and how they affect supply chain decision-making. We will also learn how to calculate these metrics. Understanding different cost drivers in supply chain work is critical for making and communicating decisions.2. Unit Cost
Unit cost refers to the cost of purchasing an additional unit and includes the manufacturer's raw material cost, production costs, and profit. For instance, in custom t-shirt manufacturing, the unit cost would cover raw material costs like blank t-shirts and ink, along with production costs such as energy and labor that increase as more t-shirts are produced.3. Extended Cost
Extended cost represents the cost paid for the products only and does not include one-time expenses. Extended cost is the number of units purchased multiplied by the unit cost. Imagine you purchase ten custom shirts that cost $15 each. The extended cost is $150.4. Non-Recurring Expenses
Even when buying products from a supplier, there are often one-time costs that must be paid to enable production. Suppliers often pass these costs on to the purchasing company. Common examples of non-recurring expenses include tooling or fixtures specific to the product being manufactured, engineering expenses to set up production, or even a minimum charge to occupy manufacturing equipment. As production volumes increase, it is common for non-recurring expenses to increase. This happens because higher volumes require either more manufacturing equipment or more labor for setup and management.5. Full Cost
Full cost represents the total amount a company must pay to buy a certain quantity of products. Full cost is the sum of the extended cost and the non-recurring expenses. When making a supply chain decision, focusing on the full cost is imperative because it is the total amount the company will pay to acquire the products. While this might seem like common sense, it is easy to be fooled by the allure of low non-recurring expenses or low unit costs. Let's revisit the custom t-shirt example. The shirts cost $15, but the supplier charges a $65 set-up fee regardless of the quantity purchased. This fee is a non-recurring expense to compensate the company for the time to load the artwork onto the printer. We can now calculate our full cost. We add our $150 extended cost from before to the $65 set-up fee, resulting in a full cost of $215.6. A note about Overhead Rates
Full cost often includes overhead rates. The overhead rate is a cost allocated to the production of a product or service. Overhead costs are expenses that are not directly tied to production such as the cost of the corporate office. Because overhead calculation methods vary from company to company, overhead rates are not included in the full cost calculations in this course. However, the principles you learn in this course will enable you to incorporate overhead rates into your reports.7. Let's calculate some Full Costs!
It is time to apply what you have learned about extended costs and full costs to our dataset.Create Your Free Account
or
By continuing, you accept our Terms of Use, our Privacy Policy and that your data is stored in the USA.