Tag: capacity

Plan Cost Centers

Cost center planning begins with clarifying which production-dependent activities are to be performed in the plan period and which additional internal tasks are to be performed. This activity reference forms the basis for determining the planned costs per cost element.

Plan Cost Centers

Quantity, activity, and task-related annual planning as described in previous posts generate the orders for the cost center managers responsible for implementation. Like every manager, they are responsible in their area for QQDR: qualities, quantities, dates, and results (see the post “The management cycle determines the value types”). The performance requirements arise from:

    • the planned production quantities envisaged,
    • the necessary internal services provided, and
    • the planned internal tasks.

As a first step, cost center managers must therefore consider what services or results their area must deliver. From this, it can then be derived which staffing levels and which assets are required for this. The requirements are derived from the plans already drawn up:

    • From the planned production quantities, the planned activity levels of a production cost center can be derived with the help of the work plans. From this, the personnel requirements for the production-related work are determined.
    • From the internal tasks planned for the given cost center, the hourly requirements for work that is not directly production-related are derived. These are the working times for cost center management, training and education, inspection work, participation in projects, and attendance at meetings of all types.
    • The machines and installations installed in a cost center largely determine how much activity will have to be obtained from internal service providers (workshops, maintenance, internal transportation, energy, and so on).

The head of the Stamping cost center has the following planning basis concerning activities, employees, and machinery:

    • According to production planning, his cost center should be ready for an activity level of 338,855 personnel minutes (Pmin).
    • For the stamping work and for internal tasks, 4 full-time positions are required (including the manager), as each employee is planned with a net annual presence time (vacation public holidays and other absences already deducted) of 102,000 minutes (4 x 102,000 = 408,000 minutes).
    • The capacity of the installed machines is still sufficient at 435,840 minutes.

On this basis, he begins to plan the primary costs to be incurred for the planned activity. To do this, he receives a list of the plannable cost types from the controller. This is shorter than the list of the expense types in accounting as it is defined to plan the costs of this cost centers consumption:

    • To do this, the personnel costs including all social welfare costs are prepared in the personnel area and reported to the cost center manager as a total amount. Since the cost center manager cannot change the rates for additional wage-dependent costs (for example, insurance, vacation), one aggregate cost category for Personnel costs is sufficient. This makes planning and control easier.
    • The controller prepares the imputed depreciation amounts in Fixed Asset Accounting based on the assets installed in each cost center and reports this information to the cost center manager.
    • Primary costs are characterized by the fact that they come from outside the company and, with few exceptions, are always posted in Accounts Payable or Payroll Accounting. If such costs are to be provided in the cost center (office materials, supplies, etc.), the planner consults invoices from previous years, maintenance plans and other documents to determine the planned cost amount.

This procedure is directly linked to the process of management by objectives. Once the cost center manager has prepared his cost and activity planning, he agrees on the target cost center budget with his boss. For this reason, the cost center plan may only contain amounts and cost elements that the responsible person can influence directly.

Cost center planning does not yet contain the planned costs for internal services provided. These are called secondary costs as they stem from another cost center. In the table of planned internal activities in the post “internal services provided” it was shown that in the plan year 240 service-hours are to be obtained from the maintenance and repairs cost center (330). Its hourly rate is 38.95, which results in a debit of 9,348. The planned cost for energy consumption was calculated accordingly. A total of 536 is planned for this. The complete planned costs of the stamping shop are as follows:

Plan Cost Centers
Plan Cost Centers: CC 220 Stamping

The detailed sequence of the calculations can be traced in the simulation model accompanying Management Control with Integrated Planning – Models and Implementation for Sustainable Coordination.

To use the cost center plans in product calculation the next post will first provide clarity about cost terms in the management control system.

Capacity Requirements for Internal Tasks

Even in typical production plants, more than 50% of personnel costs today are attributable to internal tasks. These are tasks that are performed in order to be able to start production and sales at all. Consequently, internal tasks must also be planned and tracked.

Capacity Requirements for Internal Tasks

Internal tasks are the collective term for all work to be executed in an enterprise that is not directly caused by the units produced or by internal services provided. Internal tasks are only indirectly related to the products and services produced or sold. Examples include:

    • Management, planning and control work in all areas
    • Work of the entire sales-oriented areas
    • The entire production planning and control as well as the work preparation
    • The work of the personnel department, payroll accounting and the time spent on training and further education
    • Work of the functions purchasing, warehousing, forwarding
    • Tasks for the further development and operation of the entire information technology as far as it is not a matter of orders of individual areas and thus internal services provided.
    • Provision of buildings, company premises, installations, and machines ready for operation
    • Administrative work to meet legal requirements.

What these Internal tasks have in common is that they are performed for the capability of the organization to perform at all. Managers decide how much work capacity is to be built up and made available in the form of employees or investment capacity as part of strategic and operational planning.

These capacities must always be included in the overall planning of an organization. This can be explained by the fact that nowadays in all industrial companies known to us, more than 50% of the total personnel costs are incurred for internal tasks.

The difficulty is to create a reliable capacity requirements planning for the areas of Internal tasks. One reason for this is the fact that people in these areas often perform a wide variety of tasks in parallel. On the other hand, only a few companies record time consumption for Internal tasks. This makes it difficult to plan the time requirements. In order to get a better grip on capacities and the cost pool for Internal tasks, we have therefore long recommended that work for Internal tasks should also be integrated into factory data capture. Although attendance time can be measured quite easily using time recording devices, many managers are not even required to carry out this recording for themselves. The work for which the time was spent cannot be evaluated from the presence time recording system.

Our experience showed that even the planning of task types in internal areas generates important insights for capacity planning. For this purpose, we divide the tasks into six groups, which occur in almost every cost center:

Capacity Requirements for Internal Tasks
Capacity Requirements for Internal Tasks

Task 5 (subject tasks) can be subdivided by cost center. In a sales office cost center, for example, these could be tasks such as addressing potential customers, looking after existing customers, preparing quotations, negotiating contracts.  In the personnel department it could be personnel recruitment and selection, wage and social insurances, personnel and illness care, documentation of management and specialist staff potential.

Capacity requirements planning is also an essential prerequisite for Activity Based Costing. For Internal tasks, the direct cause-effect relationship is missing, but capacity requirement estimates can be used to improve the planning quality of fixed costs.

Planning at the level of detail described above benefits the entire company. Since employees are usually reluctant to fill out the activity recording for the actual times incurred, a user-friendly and thus largely automated recording application should be set up.

Thanks to the Lean Production movement impressive improvements have already been achieved in the area of directly product-related services and production management, Now it is important to apply the findings to Lean Administration as well. This helps to improve the cost position towards competition.