Issue one: Labor Cost
“Labor cost consist of the cost of the work that goes into the manufacturing of a product or the execution of a service. Direct labor cost can be figured by multiplying the cost of labor per hour by the number of employee-hours required to complete the job. Business owners, however, need to keep in mind that the “cost of labor per hour’ includes not only hourly wage or salary of the employees, but also the costs of the benefits that those workers receive.
Issue two: Material Cost
Material costs are the costs of all materials that are part of the final product offered by the business. “Direct materials are assigned to jobs in a manner very similar to direct labor. It is very important that material that is used on a specific job be matched to the job” (Wainwright, 2012). As with labor, this expense can apply to both goods and services. In the case of goods, material costs refer to the costs of the various components that make up a product, while material costs associated with services rendered typically include replacement parts, building parts, etc.
Issue three: Overhead Cost
Overhead costs are costs that cannot be directly attributed to one particular product or service. Some business consultants simply refer to overhead costs as those business expenses that do not qualify as labor costs or material costs. These costs include indirect expenses such as general supplies, heating and lighting expenditures, depreciation, taxes, advertising, rental or leasing costs, transportation, employee discounts, damaged merchandise, business memberships, and insurance. A certain percentage of employees usually fit in this category as well. While the wages and benefits received by an assembly line worker involved in the production of a specific product might well qualify as a labor cost, the wages and benefits accrued by general support personnel janitors, attorneys, accountants, clerks, human resource personnel, receptionists are included as overhead.
Overhead expenses are typically divided into two categories fixed expenses and variable expenses. Fixed expenses are regular (usually monthly) expenses that will not change much, regardless of a company’s business fortunes. Examples of fixed expenses include rent, utilities, insurance, membership dues, subscriptions, accounting costs, and depreciation on fixed assets. Variable expenses are those expenses that undergo greater fluctuation, depending on variables such as time of year (for seasonal businesses), competitor advertising, and sales. Expenses that are more heavily predicated on company revenues and business owner strategies include office supplies, mailing and advertising, communications (telephone and Fax bills), and employee bonuses.
Wainwright, S. K. (Ed.) (2012). (Links to an external site.) Links to an external site. (Links to an external site.) Links to an external site. Principles of accounting: Volume II [Electronic version]. Retrieved from https://content.ashford.edu (Links to an external site.) Links to an external site.
ThursdayJun 15 at 12:31pm
A company can run into any number of problems when trying to determine the actual costs of goods that it is selling there are three main problems; labor costs, materials cost and overhead costs. Labor costs are in relation to what an employee will be compensated for their work on a given task. For example, let’s look at companies like Thrive or Essential oils, they sell a wide variety of products and they have sales people that go out and try to sell their products. So, how are they to determine how much of the money paid to the sales people should be attributed to each individual product? This particular problem makes it more difficult to know what the actual cost of producing and selling each product is. Though sometimes the sales person might not make an actual hourly wage they still will receive pay for selling the product. Material costs would be the cost that is used to make the product, now here is where things can get tricky because most of the time materials are bought then the cost of inflation goes way up so that way the company is making a better margin off of what they are selling. An example would be Pottery Barn, the quality of their furniture is actually not great at all in fact I have seen margin reports from this company and the profit made off of the merchandise is unbelievable. Overhead costs are sometimes not totally controllable but are the operating expense it takes to make the product, house etc.
Identify three factors that are affecting airline company’s ability to break even. For each of your factors, discuss how these have an impact on the breakeven (contribution margin, fixed costs, variable costs, a combination, etc.), and what happens if these factors increase or decrease.
Cargo, freight and the cost of fuel will be major factors that will affect airline company’s ability to break even. The older planes will need to be removed so that the production on new planes can arrive. That brings about a demand for more space, more flights, and more fuel usage. It all goes hand and hand. The more cargo that needs to be flown, the more space needed to ship it. When the oil prices increase it raises the cost of fuel and that makes an impact on demanded flights to destinations. Cargo will also be affected and increase. Flight demands are increasing and that will demand the increase the labor and overhead variables. Wages paid to employees will increase. Ticket prices, luggage prices go up and the cost of fuel will increase, this will cause a demand for more efficient planes that may cost more due to advanced technology. Older planes will be replaced with new planes.
Zacks Investment Research. (2011). Airline Industry Stock Outlook – July 2016. Retrieved from https://www.zacks.com/commentary/84559/airline-industry-stock-outlook—july-2016
We’ve all experienced (or heard about) the challenges that the airlines have been facing. Read the Zacks Investment Research article, “Airline Industry Stock Outlook – July 2016 (Links to an external site.)Links to an external site.Links to an external site..” Identify three factors that are affecting airline company’s ability to break even. For each of your factors, discuss how these have an impact on the breakeven (contribution margin, fixed costs, variable costs, a combination, etc.), and what happens if these factors increase or decrease.
I believe that the three factors that are affecting airline company’s ability to break even are:
1. Terrorism is the number one factor affecting the airlines, especially since the Brexit decision to leave the EU. Additionally, airlines stocks have been hit hard by fears of travel demand slackening. Airlines stocks have been dealing with issues such as the mass shooting in OrlandoFl, the explosion at the Shanghai Pudong airport on June 12. Fears that such attacks could lead to less demand for air travel resulted in a widespread sell-off in the aviation section. (Zacks, July-2016)
2. The second factor has been the oil prices, for many years the airline’s tickets prices increased to a point, that ticket sales went down, due to the high price of jet fuel, which is a worrying factor for airlines, since they have been generating huge savings. (Zacks, July 2016)
3. The third factor is the economic and political stability. Political and legal factors include governmentintervention in economic operations. Airlines operate in a political environment that’s very regulated and restricted. Government intervention can be necessary to protect the passengers’ interest and airlines operations’ safety measures.
Furthermore, a healthy economy acts as a catalyst for industrial growth. Economic health is also measured by various economic indicators. Examples of economic indicators include growth in gross domestic product (or GDP), per capita income, disposable income, industrial production, the level of business, and consumer confidence. (Cederholm, Sep 3, 2014)