This document discusses key concepts related to costs and productivity for warehouse and inventory management. It defines fixed and variable costs, and explains how to calculate total cost, average cost, and cost per unit. It also defines productivity and provides examples of how to calculate production throughput using information about units, associates, production rates, and time. Finally, it includes some example questions to practice calculating staffing needs based on productivity metrics.

1. NASHVILLE STATE Community College
Warehouse & Inventory Management
LOGI 1030
Costs: Fixed Costs and Variable Costs
Cost Per Unit and how it is calculated
Productivity Calculations
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2. Costs
A sound decision is a decision where only the relevant costs are considered.
These are costs that result directly from the decision being made.
Irrelevant costs should be ignored. Irrelevant costs are costs that are incurred
regardless of the decision being made.
So, how do you tell Relevant from Irrelevant costs?
Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)
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3. Types of Cost
Costs
Avoidable Costs Unavoidable Costs
(Sunk Costs: a cost that has already
been spent and can not be recovered)
Variable Costs: Fixed Costs:
• Avoidable in the short run • Avoidable in the long run
• Change with the amount the • Remain the same regardless of
company produces (labor, sales, materials, how much the company produces
commissions, etc…) (rent, utilities, depreciation, taxes, etc…)
Short Run: A period too short for the company to do much about its plant size.
Some expenses are fixed. Consider only variable costs.
Long Run: A period long enough for the company to change its plant size.
All expenses are variable. Consider all relevant costs.
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4. Types of Cost
Total Cost (TC) TC = Fixed Cost (FC) + Variable Cost (VC)
TC FC + VC FC VC
Average Cost (AC) AC = = = +
Quantity (Q) Q Q Q
If the average cost (AC) falls as output (quantity (Q)) increases, the company is
experiencing economies of scale.
In the short run, economies of scale almost always arise from the existence of
fixed cost (FC). Why??
For example: The cost per passenger on a cruise ship decreases until the ship
is full. This is because for each additional passenger, the cost of the fixed
expenses (salary of the crew, fuel, insurance, etc…) is spread across greater volume
(the passengers).
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5. “CAUTION”
However, large volumes may some times result in HIGHER average costs.
Why?
These diseconomies of scale are due to limitations in production capacity
which require the company to incur higher expenses due to:
Overtime pay
Outsourcing
Varying away from normal processes
Bottlenecks
Any others?
cpu
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6. Cost Per Unit
Cost Per Unit (CPU) is the average cost to produce one unit.
CPU considers the following variable costs:
Hourly wage rate
Overtime rate Components of “Total Payroll”
Benefits rate
Volume (# units produced)
CPU = Total Payroll
Units
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7. So, where do we get this information from?
The CPU Report
CPU 1.xls
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8. CPU = Total Payroll
Units
Let’s calculate the CPU from the CPU report:
CPU 2.xls
Total Hours Paid: 13,810.05
x Effective Average Wage: $18.72 $258,524
CPU = = $0.342
= Total Payroll: $258,524 755,151
Total Units: 755,151
Productivity
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9. Productivity
Department productivity is the average rate of production of each person assigned
to the department.
Productivity tells you how efficient the department is at managing its
work flow with its available labor resources and work processes.
Productivity includes:
Total Production Hours
All hourly employee hours that are clocked into the
department.
Includes production based task hours, as well as,
non-production based task hours (leads, material
handlers, etc…)
Units
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10. We get this information from the CPU Report as well…
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11. Productivity
Let’s calculate Packing productivity from the CPU report:
CPU Packing.xls
Productivity = Units
Total Production Hours
Units = 512,949
512,949
Productivity = = 489.59
1,047.70
Production Hours = 1,047.70
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12. CPU and Productivity
How can we use CPU and Productivity information?
• To determine how efficient your current process are
• To determine if your employees are utilized in their highest capacity
• To help you discover waste and bottlenecks in your work processes
• To determine how efficient your employees are at performing their job tasks
• To help you determine if your production standards are too low
Throughput
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13. Production Throughput Calculation
In order to manage any process you need to know how to calculate the
production/throughput rate of that process.
There are four pieces of information required. So long as you have any three
pieces you can solve for the fourth.
The four pieces of information are:
• # of units, lines, cartons, etc…
• # of associates
• Average hourly associate rate of production
• Time (usually in hours)
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14. Production Throughput Examples
Example 1:
If you have 10 associates, packing 300 units per hour, and there are
8 hours in a shift, how many units can your department pack?
10 300 8 24,000 units
_____ x ______ x _______ = _____________
Example 2:
You have 5,500 lines to pick, there are 4 hours left in the shift, your
average production rate is 135 lines per hour, how many pickers do
you need?
5,500 4 135 10 pickers
(________ / ____) /_____ = _____ _____
Example 3:
You have 8,300 units to sort, you have 7 sorters, and they sort at a rate
of 200 units per hour, you need to be finished in 4.5 hours. Will you
be finished sorting in 4.5 hours?
7 200 4.5 6,300 units
_____ x ______ x _______ = _____________ < 8,300 units NO
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Income Statement

15. Exercise Questions
You are the 2nd shift picking supervisor and are very concerned about when you will
be finished picking today’s work. The time is 5:00 pm. The total number of lines
left to pick is 3,150. You have 14 pickers who are picking an average of 132 lines per
hour. What time, to the nearest half hour, will you be finished picking?
You are the 1st shift Manual Sort supervisor. Your goal is to leave no more than 14,000
units remaining to sort before you hand off to the 2nd shift supervisor at 5:00pm. The
time is now 3:00 pm. You currently have 27,525 units to sort. How many sorters do you
need to achieve your 5:00 pm hand off goal? Average hourly sorter production is 495
units per hour.
The time is 11:30 am and you are the 1st shift stocking supervisor. The 11:00 am wave
just dropped to the production floor and you have to complete stock demand before
picking can begin picking the 11:00 am wave. You have 220 stock demand directives.
Stockers can pull and stock 48 directives per hour. You have 30 minutes to complete
stock demand. How many stockers do you need?
Income Statement
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16. The Income Statement
Sales
- Cost of Sales
= Margin
- Fixed Costs
= Profit
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17. The Income Statement – In More Detail
Sales
Cost of Sales
Cost of Goods Sold
Cost of Returns
Freight
Obsolete Inventory
Variable Costs
Payroll
Benefits
Temporary Payroll
Controllable Expenses Workers Comp
Utilities
Operating Supplies
Maintenance
Margin
Fixed Costs
Depreciation
Rent
Non-Controllable Expenses Taxes
Insurance
Pension
Profit
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18. A Closer Look at Expenses
Operations G&A
Bonus Accrual Employment Expense
Payroll *
Pension Expense Accrual Workers’
Overtime
Education and Seminars Compensation
Holiday/Vacation pay
Travel Rent Building
Benefits *
Auto and Truck Insurance
Payroll Taxes
Office Equipment Depreciation
Operating Equipment
Telecommunications Taxes - Miscellaneous
Uniform Expenses
Office Supplies
Temporary Personnel
Dues and Subscriptions
Operating Supplies *
Sundry Personal
Service Fees
Copier Costs
Maintenance and Repair
Computer Services
Rent Equipment
Sundry Outside Services
Janitorial Supplies and
Services
Utilities
Associate Incentive
Postage
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