Business Operations

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Direct Materials Standards

Direct materials are raw materials traceable to the manufactured product, such as the amount of flour used to make a cake. To compute the direct materials standard price [more…]

How to Determine Direct Labor Standards

Direct labor is the cost of paying your employees to make products. Proper planning requires setting standards with respect to two factors: the direct labor standard rate and the direct labor standard [more…]

How to Calculate the Overhead Rate

Standard costs need to account for overhead (the miscellaneous costs of running a business) in addition to direct materials and direct labor. Overhead is much more difficult to measure than direct materials [more…]

How to Determine the Standard Cost Per Unit

To find the standard cost, you first compute the cost of direct materials, direct labor, and overhead per unit. Then you add up these amounts.

The figure applies this approach to Band Book Company. To calculate [more…]

How to Compute Direct Materials Variances

A direct materials variance results from one of two conditions: differences in the prices paid for materials or discrepancies in the quantities used in production. To find these variances, you can use [more…]

How to Calculate Direct Labor Variances

A direct labor variance is caused by differences in either wage rates or hours worked. As with direct materials variances, you can use either formulas or a diagram to compute direct labor variances. [more…]

How to Compute Overhead Variances

Whenever you see direct labor and direct materials, overhead can’t be far behind. To compute overhead applied, multiply the overhead application rate by the standard number of hours allowed: [more…]

Teasing Out Variances

In your business, variance analysis helps you identify problem areas that require attention, such as poor productivity, poor quality, excessive costs, and excessive spoilage or waste of materials. [more…]

Cost-Plus Pricing

Many retailers and manufacturers set their prices at cost-plus by adding a fixed markup to their absorption cost. Cost-plus pricing ensures that prices are high enough to meet profit goals. The figure [more…]

Extreme Accounting: Trying Variable-Cost Pricing

Variable-cost pricing offers an adventurous variation on cost-plus pricing. Instead of adding a markup on total cost, variable-cost pricing adds a markup on just the variable cost. It disregards fixed [more…]

Hitting Your Target Cost

Many industries use price points — special “magic” price levels that customers expect to pay. You’ve probably seen these prices in the store: $99.99, $26.99, [more…]

Two Sources of Equity Financing

Every business — regardless of how big it is, whether it's publicly or privately owned, and whether it's just getting started or is a mature enterprise — has owners. Virtually no business can get all the [more…]

How to Leverage Equity Capital with Debt

Leverage refers to the idea of using debt to add capital to your business. Leverage is a good strategy if the company can generate more in earnings than it pays in interest expense and fees on the debt [more…]

The Basic Business Plan

A solid business plan should represent management’s foundation and justification for birthing, growing, operating, and/or selling a business based on present economic and market conditions and future projections [more…]

The Evolution of Business Plans

The real start of developing any business plan is coming up with the initial concept, idea, or thought. Over time, the plan evolves usually in line with the following progression: [more…]

Drafting Your Business Plan

You can begin drafting the business plan after the business’s executive management teams or new company founders have decided that the concept for the new business endeavor has merit [more…]

The SWOT Analysis

Strengths, weaknesses, opportunities, and threats (SWOT): A SWOT analysis is an effective planning and budgeting tool used to keep businesses focused on critical issues that may lead to wonderful successes [more…]

Simplicity and Business Plans

You know what KISS stands for: Keep it simple, stupid. Used in the marketing world for years, the concept of KISS also applies to business plans. When developing a business plan, be as clear and direct [more…]

Incorporate Third-Party Information into Your Business Plan

When building reliable and credible business plans, don’t underestimate the importance of accumulating data and information from reliable independent third parties [more…]

Evaluate the Data Included in Your Business Plan

During the planning process, evaluate your data to make sure it’s complete, accurate, reliable, and timely (CART). Actually, you should apply the concept of CART to all business segments; whether you’re [more…]

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