Is unit cost driven by the price or by the volume?
A standard cost built the way a cost accountant builds it: material, scrap, labor, overhead and absorbed fixed cost. Put ranges on it and the input that decides your unit cost turns out to be the one the cost team does not control.
Operations Intermediate Monte Carlo Pro engine
After you install, this is the model to open.
Will Unit Cost Land Where the Budget Says?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
- Chance of holding the $18 budget
- 32% the standard cost said $17.82 and looked safe
- Simulated full cost
- $18.30 mean, running $17.45 to $19.27, P5 to P95
- The real driver
- Volume rank correlation -0.70, ahead of material at +0.67
- Absorbed fixed cost
- $1.32 of spread per unit inside an $18.00 budget
A standard cost, built the way a cost accountant builds one: $8.40 of material grossed up for 3.5% scrap, $1.93 of labor at 4.2 minutes and $27.50 an hour, $1.15 of variable overhead and $6.04 of fixed factory cost absorbed across 240,000 units. That is $17.82 against an $18.00 budget, and the budget looks safe. Three things move: the material price, the scrap rate and the volume.
Click Run and the full cost averages $18.30 with a median of $18.27, a P5 of $17.46 and a P95 of $19.25, and the over budget flag comes back at 0.68. The budget is beaten in 33 of every 100 years. Now read the tornado, because it is not what the purchasing conversation assumes. Volume comes first, at a rank correlation of about negative 0.70.
Material price is second at about positive 0.66. Scrap is a distant third at about 0.18. Volume is a cost driver, and a bigger one than the price of the material, because a third of the unit cost is a fixed number divided by a volume nobody in the cost team controls. Add the absorbed fixed cost as the third output and it runs from $5.67 at the P5 to $6.99 at the P95, a $1.31 spread on an $18.00 budget.
Two second runs, and both are worth doing because they price two different meetings. Cut the scrap range to a PERT of 0.015, 0.025 and 0.045, which is what a real yield improvement program buys, and the over budget flag falls from 0.68 to 0.60. Now put scrap back and tighten the volume range to a triangular 225,000, 240,000 and 255,000, which is what a firmer sales commitment looks like, and the flag falls from 0.68 to 0.57.
A conversation with sales about commitment is worth about as much to your unit cost as a whole yield program, and until you run this the argument goes the other way every time. What the model leaves out: it holds the labor minutes and the fixed cost constant, so it cannot show you the step change when volume needs a third shift, and it carries one part number, so it has nothing to say about how the fixed cost is shared across a range.
To make it yours, put your own purchase price and scrap rate in, take the fixed factory cost from your own cost center report, and widen the volume range until it covers the worst forecast miss you have actually had.
The model
It arrives on a tab called Template: Will Unit Cost Land Where the Budget Says:
| Volume for the year (units) | 240000 |
| Material per unit at standard ($) | 8.4 |
| Scrap rate | 0.035 |
| Material per good unit ($) | 8.705 |
| Direct labor minutes per unit | 4.2 |
| Labor rate including on costs ($ an hour) | 27.5 |
| Labor per unit ($) | 1.925 |
| Variable overhead per unit ($) | 1.15 |
| Fixed factory cost for the year ($) | 1450000 |
| Fixed cost absorbed per unit ($) | 6.042 |
| Full cost per unit ($) | 17.82 |
| Budgeted cost per unit ($) | 18 |
| Over budget (1 = yes) | 0 |
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- The business case says yes. What are the odds?Is the New Machine Worth It?
- How far short could the season finish?Will the Season Hit Its Number?
- Which of your peak-season fixes actually pay?What Could Go Wrong at Peak?
- Tool up or keep paying the supplier?Make It or Buy It?
- Is the round your driver does now the shortest?Which Order of Stops Makes the Shortest Delivery Round?
- How much does it cost to pull the event now?What If It Has to Be Cancelled?
Every model like this one, and the method behind them: Monte Carlo simulation.