1. + Cost Centers Identifying and Breaking Down Job Costs

2. Learning Goals After completing the activities in this slideshow lecture you should be able to… 1. Define Cost Centers 2. Identify printing company cost centers 3. Calculate company profitability from known DEBITS and CREDITS 4. Identify cost centers in your own life

3. What is a Cost Center? A Cost Center is a grouped area of interest within an organization that costs the company money. Some cost centers cost the company money and are never able to recoup their own costs like secretaries, janitors, managers, etc… Everything thing these employees do costs the company money. Other cost centers, like salesman, are responsible for generating enough revenue to keep the company profitable.

4. What is a Cost Center? What is included in a Cost Center? Cost Centers can be people, equipment, or even facilities. If something costs a company money it must be accounted for. We do this by organizing costs into cost centers and then establishing Budgeted Hourly Rates (BHR).

5. What is a Cost Center? What is included in a Cost Center? For example, a BHR for the printing press to the right might be billed at $400 per hour even though the monthly mortgage payment is only $1,000. In theory, this press should only cost $6.25/hr to run (see below), but we must bill $400/hr to account for all of the other costs that keep the company running but do not have a billing rate (secretaries, janitors, etc…) $1,000 ÷ 160 working hours per month= $6.25/hr

6. What is a Cost Center? What is a BHR? A BHR is a budgeted hourly rate. BHRs are used when creating pricing. All cost center costs like employee salaries, monthly lease prices, electric bills, etc… must be incorporated into every item that is sold by a company.

7. What is a Cost Center? What is a BHR? If we were to print 1,000 postcards we couldn’t simply charge the client $10 for ink and $100 for paper. We must charge them a higher rate to overcompensate for all the costs our company incurs on a daily basis like the mortgage payment we make on the printing press, our electric bill to keep the press running, and the pressman’s salary, plus a portion of our receptionists salary, and the estimator’s salary and everything else in the company that doesn’t generate its own revenue.

8. Identifying Cost Centers Everything within a company that cost the company money must be accounted for in order to maintain profitability. The following is a list of items in a company that cost money. Monthly building lease or mortgage Salaries for all employees (except salesman or those working strictly on commission) Monthly utilities (electric, gas, cable, etc…) Client services (client room entertainment, food, and beverages for clients while doing a press check) Office furniture and equipment Routine maintenance of equipment (computers, servers, printing presses) Delivery truck payment and maintenance Additional office costs (healthcare and 401K contributions, lawyer services, accountants, etc..)

9. Identifying Cost Centers Knowing that these unaccounted for costs exist, companies can setup a game plan to absorb the costs into money making areas of their company. Let’s identify ways in which a company can maintain profitability. In simple terms, a company will be profitable if it brings in more money than it pays out. Credits – Debits = Balance If the balance is positive the company has made a profit. If the balance is negative the company is losing money. Credits:Money added to an account Debits:Money removed from an account

10. Profitability Are these companies profitable? 1. A printing company generates $240,000 per year in revenue from printing jobs. 10% of all printing sales go to the salesman and the rest is used to cover daily operating costs (cost center costs). Will this company be profitable if their monthly operating costs (cost center costs) are $19,400? Step 1:Add all yearly revenue (CREDIT) Step 2:Remove all salesman commissions (DEBIT) Step 3:Remove all yearly operating costs (DEBIT) Step 4: The amount left over is the company’s profit or loss.

11. Profitability Are these companies profitable? 1. A printing company generates $240,000 per year in revenue from printing jobs. 10% of all printing sales go to the salesman and the rest is used to cover daily operating costs (cost center costs). Will this company be profitable if their monthly operating costs (cost center costs) are $19,400? Step 1:+ $240,000 yearly revenue Step 2:- $24,000 salesmen commissions (10% of $240,000) Step 3:- $232,800 yearly operating costs ($19,400 x 12 months) Step 4: -$16,800 LOSS

12. Profitability Are these companies profitable? Try this one on your own 2. A printing company generates $1,400,000 per year in revenue from printing jobs. 10% of all printing sales go to the salesman and the rest is used to cover daily operating costs (cost center costs). Will this company be profitable if their monthly operating costs (cost center costs) are $82,000?

13. Profitability Are these companies profitable? (Answer) 2. A printing company generates $1,400,000 per year in revenue from printing jobs. 10% of all printing sales go to the salesman and the rest is used to cover daily operating costs (cost center costs). Will this company be profitable if their monthly operating costs (cost center costs) are $82,000? Step 1:+ $1,400,000 yearly revenue Step 2:- $140,000 salesmen commissions (10% of $1,400,000) Step 3:- $984,000 yearly operating costs ($82,000 x 12 months) Step 4: +$276,000 PROFIT

14. Cost Centers in Your Own Life You can identify cost centers in your own life to help manage your finances. Your 2 nd quiz this week requires the assembly of a daily log of cost centers in your life with associated costs. Here is an example of what my daily cost center breakdown might look like: My Daily Cost Centers for June 30, 2012: Daily Salary:+$193.33 ($2,900 per pay ÷ 15 days per pay period) Rent Payment:-$39.52 ($1,225 rent ÷ 31 days in the month) Monthly Bills:- $38.71 ($1,200 in various monthly bills ÷ 31 days in the month) Gas:-$2.86 ($40 to fill tank ÷ 14 days between fill ups) Morning Coffee:-$3.45 Lunch:-$8.00 Mega Millions Tickets:-$20.00 TOTAL:$80.79 (PROFIT)

15. + What’s Next? Cost Centers (HW) Cost Centers (Q1) Cost Centers (Q2)