Lesson video

Hello.

My name's Mrs. Taylor and I'm really pleased you can join me here today for our lesson.

Our lesson today is costing, and this is from the Designing and Making Principles unit.

The outcome.

I can explain how a range of factors affect product costing in industry.

We have three key words, overhead, the ongoing cost of running a business, economies of scale, as production increases, the cost per unit decreases, and automation, the use of technology to perform tasks.

Our lesson today has three learning cycles, understanding costs, factors affecting costs, and managing costs.

Let's get started.

When we think about product costs, we often focus only on materials.

However, the real cost of making a product includes materials and labour and overheads.

The overhead is the ongoing cost of running a business.

All of these added together equals the total product cost.

Let's have a check.

A company spends £4.

50 on raw materials, £2 on labour, and £3.

50 on overhead per product.

What percentage of the total cost is spent on labour? Is it A, 15%, B, 20%, C, 25%, or D, 30%? Pause the video and have a go.

Wonderful, let's check.

That's right, it's 20%.

We can see here the calculation, £4.

50, at £2, at £3.

50 is £10.

The labour percentage is two divided by 10 times 100 is 20%.

Well done.

Materials, labour and overheads are explained further below.

Materials, the resources and components used, for example, timber for furniture or fabric for clothing.

Labour, the cost of having workers who manufacture the product, for example, wages.

And overheads, the ongoing business costs like rent, electricity and machine maintenance.

Overheads refers to the ongoing cost of running a business that aren't directly linked to making a single product.

Even if no products are made, businesses still have overhead costs.

Examples include factory rent and utilities.

Utilities means electricity, water and waste disposal.

Worker salaries, wages, sick pay, maternity pay and employee benefits, machinery maintenance including repairs, safety checks and replacement of parts.

Product costing can be split into two main categories, direct and indirect costs.

Direct costs are linked to the making of the product, for example, materials and labour.

Indirect costs which are necessary for production, i.

e.

overheads, include factory rent and electricity and staff salaries.

Here we have a check.

Which of the following is an example of an indirect cost? Is it A, raw materials, B, factory worker wages, C, electricity for the factory, or D, packaging materials.

Pause the video and have a go.

Wonderful, let's check.

That's right, it's electricity for the factory.

Well done.

Labour costs depend on wages, automation, which is the use of technology to perform tasks.

Both are linked to ethical concerns.

Outsourcing labour to developing countries is a cheaper option than using local workers, but they may be working in poor conditions without decent pay.

Using machinery is initially expensive, but cheaper in the long run because of their speed and accuracy.

Human manufacturers may lose their jobs.

Task A.

Look at the table below that shows the costing for manufacturing a school lunchbox.

The materials are £2 per lunchbox, labour, £1, factory rent, 50 pence, utility bills 50 pence, giving us a total of £4.

Part one.

If the company wants to reduce overhead costs by 10%, how much would that save per lunchbox? And two, if the company wants to reduce costs, should they cut materials, labour or overheads, and explain why.

Pause the video.

Great.

Let's have a look at some of the answers you could have come up with.

The overhead is £1 divided by 10 times 100 is 10 pence.

So if the company wants to reduce overhead costs by 10%, they would save 10 pence per lunchbox.

If the company wants to reduce costs, should they cut materials, labour or overheads, and explain why.

Cutting material costs might lower quality, which could reduce sales.

Reducing wages could lead to unhappy workers, but automation might help.

Finding cheaper rent, using less electricity or sustainable energy can reduce overheads.

The company should look at overhead costs first.

Well done.

We now move on to the second learning cycle, factors affecting costs.

Costs are influenced by internal factors and external factors.

Internal factors affect cost because they are decisions made within the business.

External factors also affect cost, but they cannot be controlled by the business.

These factors cause prices to fluctuate, which means to go up and down.

On top of this, companies add a profit, money a business makes after paying all of its costs.

Let's have a check.

A business sells a product for £20.

The cost to produce one unit is £12.

What is the profit per unit? Is it A, £6, B, £8, C, £10, or D, £12? Pause the video and have a go.

Wonderful, let's check.

That's right, it's £8.

The answer is B.

The profit equals money earned minus money spent would be £20 minus 12 equals £8.

Well done.

Internal factors within business control include material choice.

High quality materials are more durable.

Low quality materials can affect reputation.

Labour and wages.

Skilled workers cost more.

Less skilled workers need training and skilled workers improve quality.

Economies of scale.

Enough consumer demand and making more units reduces the cost per unit.

And production methods.

Automation reduces long-term costs, but is initially expensive.

Handmade costs more due to longer labour time.

External factors which are outside the business's control include materials are sourced globally and prices and demand change frequently.

If prices rise, production costs increase.

Delays in the supply chain, for example, availability or delivery times can increase cost.

And government regulations, for example, taxes, minimum wage laws and safety standards, all influence cost.

Let's have a check.

Sort the following factors into either internal or external.

And the factors are government regulations, material quality, worker efficiency and competitor pricing.

Pause the video and have a go.

Wonderful, let's check.

External factors include government regulations and competitor pricing.

Internal factors include material quality and worker efficiency.

Well done.

Task B.

A company is manufacturing a polymer lunchbox to sell in supermarkets.

They need to manage costs while maintaining quality.

Part one, explain the following cost considerations.

A, internal factors affecting cost, for example, materials and production methods.

B, external factors, for example, raw material prices, supply chain disruptions and regulations.

Pause the video.

Wonderful, let's check.

1A, businesses control internal factors like material choice, production methods and labour costs.

For example, using higher quality materials or automation can increase costs, but improve efficiency and product durability.

Economies of scale also help reduce costs as production volume increases, spreading fixed costs over more units.

And 1B, external factors such as raw material prices, supply chain disruptions and government regulations can raise costs.

Market demand and competition also influence pricing decisions, forcing companies to adapt their strategies despite uncontrollable costs.

Managing both internal and external factors helps businesses control their overall costs.

Well done.

And now we have task B part two.

A factory produces 10,000 lunch boxes per month at a cost of £1.

50 per lunchbox.

The direct costs per unit include the materials and labour, and they are £1.

The overheads include rent, utilities and maintenance, which equals £5,000 per month.

If they increase production to 50,000 lunchboxes per month, economies of scale reduce direct costs by 20%.

So we have three parts, A, what is the new direct cost per lunchbox? B, what is the total cost of producing 50,000 lunchboxes at the new direct cost? And C, what is the cost per unit now? Pause the video.

Wonderful, let's have a look at some of the answers you may have come up with.

If the factory increased the lunchboxes manufactured, the £1 direct cost is reduced by 20%.

20% of £1 is 20 pence.

So the direct cost becomes 80 pence per lunchbox.

Part B, the total direct cost equals the number of lunchboxes times the new direct cost, which is 50,000 times 80 pence.

So this equals £40,000.

Total cost equal direct cost plus overheads is £40,000 plus £5,000 equals £45,000.

And part C, what is the cost per unit now? The cost per unit equals total cost divided by the number of lunchboxes.

Therefore, it's £45,000 divided by 50,000, which equals 90 pence per lunchbox.

Well done.

We now move on to our third learning cycle, managing costs.

Businesses set prices based on the total cost of producing a product, materials, labour and overheads.

They aim to cover these costs while making a profit, which is the extra amount added to ensure the business earns money.

Key factors in pricing include direct costs, which is materials and labour, indirect costs, which are overheads, and profit, how much extra to add on.

Let's have a check.

A company wants to set a price for a new product.

Which of the following should not be considered? A, the cost of production, B, competitor prices, C, the number of products already in stock, or D, customer demand.

Pause the video and have a go.

Wonderful, let's check.

That's right, it's C, the number of products already in stock.

Companies can manage their costs and keep product pricing competitive by doing the following.

Use of automation in production, economies of scale, deals with external companies.

Automation involves using machines or technology to perform tasks that would typically require human labour.

The benefits include lower labour costs, increased production and quality, and quicker production time.

Although the investment for machinery is high, the benefits outweigh the initial cost in the long term.

Machines can work continuously without a break and nor do they need to be paid.

Economies of scale occur when businesses reduce their per-unit cost by increasing production volume.

As production increases, costs like rent, machinery and salaries are spread across more units reducing the cost per unit.

Production cost £20, the unit cost £5, production costs spread over some units compared to production costs £20 and more units £2 each, the production costs spread over more units.

Working with external companies can also help businesses manage their product costs.

The economies of scale principle applies when purchasing materials in bulk.

Businesses can pass the saving onto the customer.

For example, a company that buys raw materials in bulk might get a 10% discount compared to buying smaller amounts.

Companies can also outsource their distribution to specialised delivery firms. Shipping firms are highly specialised, which is why many businesses outsource their delivery.

Let's have a check.

A company buys materials in bulk and reduces its costs per unit from £5 to £4.

50 If they produce 200 units, how much money do they save in total? Is it A, £50, B, £100, C, £20, or D, £500? Pause the video.

Wonderful, let's check.

That's right, it's B, £100.

The difference in cost per unit is £5 pounds minus £4.

50, equals 50p.

The difference in cost per unit times the number of units equals the total saving.

So we have 50 pence 200 equals 100.

Well done.

Task C.

Part one, explain how factors such as production costs, including overheads and automation and economies of scale, can affect the final price of a product.

Use examples to support your answer.

Pause the video.

Great, let's have a look at some of the answers you may have come up with.

Direct costs like materials and labour are directly tied to production.

While indirect costs such as overheads, rent and utilities support can also affect the costing behind a business.

Automation can reduce labour costs, lowering direct costs per product.

Economies of scale also come into play.

Producing more units reduces the cost per unit as fixed costs are spread over more products.

Internal factors like automation and efficient production processes can reduce costs, while external factors such as supplier pricing or economic conditions might increase costs.

Managing these factors allows businesses to set competitive prices whilst maintaining profitability.

Well done.

Here we have a summary of our learning today.

Production costs include direct costs such as materials and labour and indirect costs, otherwise known as overheads that affect pricing.

Economies of scale reduce per unit costs as production volume increases, lowering the overall pricing.

Automation helps lower labour costs and increases production efficiency, reducing total costs.

Internal factors, for example, wages, and external factors, for example, global market, influence how businesses manage expenses and set competitive prices.

You've done so well today.

Thank you for joining me.