Page 163 - Design for Six Sigma for Service (Six SIGMA Operational Methods)

136 Chapter Seven

Cost visibility is required in order to identify the areas of high and unnecessary
costs and to find ways to reduce or eliminate these costs.
Cost-visibility techniques are well-ordered and range from very simple to
highly complex. These techniques do not tell us where unnecessary costs
are; they tell us where high costs are. This is important because they identify
a starting point.

The following is a list of definitions commonly used in cost visibility
analysis.
Cost The amount of money, time, labor, etc., required to obtain
anything. In business, the cost of making or producing a product or
providing a service.
Fixed Cost Cost elements that do not vary with the level of activity
(insurance, taxes, plant, and depreciation).

Actual Cost Costs actually incurred during the performance of a
process. They include labor, material, and burden applied in accordance
with local ground rules.
Incremental Cost Not all variable costs vary in direct proportion to the
change in the level of activity. Some costs remain the same over a given
number of production units or transactions, but rise sharply to new
plateaus at certain incremental changes. The costs thus effected are
incremental costs.
Material All hardware, raw material, and purchased items consumed
in producing a product item.
Labor Work force needed to produce a product or perform a service.
Burden (Overhead) Includes all costs incurred by the company that
cannot be traced directly to specific products. The accounting
department determines burden rates. These are assigned to individual
operations on a formula basis. Burden consists of both fixed and
variable categories, and separate rates are often established for each.
The method of assigning burden differs from industry to industry and
even from one company to another within an industry. Any quantifiable
product factor may serve as a basis for assignment of burden, as long as
consistent use of the factor across the entire product line results in a full
and equitable burden distribution.
Fixed Burden Includes all continuing costs regardless of the pro-
duction volume for a given item, such as salaries, building rent, real
estate taxes, and insurance.