CHAPTER 2. COST CLASSIFICATIONS

CHAPTER 2. COST CLASSIFICATIONS

1. I. Overview of Costs

   • Total cost = Fixed costs + Variable costs
   • Thien Long manages these two major cost categories in the production of pens and office supplies.

2. II. Fixed Costs

   • 1.Definition
     • - Do not change with production volume
     • - Incurred even when production is low or zero
   • 2. Characteristics
     • - Stable
     • - Difficult to adjust quickly
     • - Allocated gradually across units produced
   • 3. Examples at Thien Long
     • - Depreciation of machinery
     • - Factory and office rental
     • - Salaries of management and administrative staff
     • - ERP system and warehouse maintenance costs
     • - Production line maintenance
   • 4. Optimization Solutions
     • - Invest in automation
     • - Optimize production capacity
     • - Lease out or liquidate unused machinery
     • - Apply digital transformation to reduce administrative costs

3. III. Variable Costs

   • 1. Definition
     • - Change proportionally with production volume
   • 2. Characteristics
     • - Increase when output increases
     • - Easy to adjust
   • 3. Examples at Thien Long
     • - ABS/PP plastic, ink, springs
       • Ending Inventory = Beginning balance + Additions to inventory – Withdrawals from inventory
     • - Packaging, labels
     • - Quality inspection per batch
     • - Direct labor wages
     • - Electricity for machine operations
   • 4. Optimization Solutions Raw Materials
     • - Standardize consumption norms
     • -Use bulk purchase contracts to reduce cost
     • - Apply lean manufacturing to reduce waste
   • 5. Direct Labor
     • - Optimize shift planning to reduce overtime
     • - Multi-skill training
     • - Performance-based pay
   • 6. Energy
     • - Operate machines according to production plans
     • - Maintain equipment regularly to reduce energy use
     • - Install automatic sensors
   • 7. Reduce Defects
     • - Apply Six Sigma
     • - Quality checks at multiple stages
     • - Recycle defective plastic

4. IV. Overall Comparison

   • - Fixed Costs: independent of output, stable, significant in modern manufacturing
   • - Variable Costs: dependent on output, flexible, easier to control

5. V. Applications in Cost Management (Thien Long)

   • 1. Managing Fixed Costs
     • - Optimize assets and warehouse space
     • - Control administrative expenses
     • - Improve efficiency of fixed marketing costs
   • 2. Managing Variable Costs
     • - Control raw materials
     • - Optimize energy and labor usage
     • - Reduce defects to lower variable costs