I am a big fan of weddings!
One after another over the years, I have
thoroughly
enjoyed The Event, especially including my own
thirty years
ago this week. It's not just the ceremony, mind
you, but
all of the ancillary "stuff" — the welcoming
party, the
meet-and-greet, the obligatory pre-wedding athletic
activities
(a high-energy generator), the toasts, the food, the
drink, and
especially the music and dancing.
Driving home last weekend from the latest of these
memory-makers, featuring my nephew Peter and his
now-wife
Molly, I began to do a little mental number-
crunching, borne of
my role as "The Producer" of my daughter Kate's
wedding last summer. Among several lessons
that I
learned (some of them after the fact) were the
following:
- The direct cost is just the first
step in
the calculation;
- Semi-variable costs have a way of
sneaking
up on you; and
- As in almost every viable economic model,
controlling
the overhead is critical.
In the wedding business, everything revolves
around the
head count: 50 guests is different from 150
guests and
very different from 300 guests. This "production
size"
controls the selection of the sites for the
ceremony and
the reception, which is the key element in fixed
costs.
It also determines the basic variable
cost, as
a multiple of the per-person price for food and
beverage. The
add-ons — the "features and benefits"
— help to
memorialize the event (or "product") with music,
flowers,
invitations, table decorations, clothes, photography,
and so on.
These all might be considered semi-variable
costs.
The first number, then, that The Producer
confronts is
the total variable cost, perhaps $100 (food
and
beverage) for each of 150 guests, a price tag of
$15,000. With the addition of the semi-
variable and
fixed costs, however, the tally may turn out to
be more
like the current average wedding cost in the
Northeast of
about $30,000, or $200 per guest.
Similarly, in a manufacturing organization, the
basic cost
of a unit of production is for labor and material
(think:
food and beverage). This varies directly with
the
number of units produced (i.e. the more guests, the
higher the
total cost).
In the middle of the equation lie the semi-variable
expenses, those that tend to ratchet up or down as
you pass
certain thresholds of production complexity
(think: music
— maybe a D.J. for 50, a three-piece combo
for 100, or
five pieces and a vocalist for 200).
At the other end of the spectrum are
fixed costs
for the plant and equipment (think: site). The
more units
that you can produce within these fixed costs, the
lower your
unit costs, e.g. —
$200,000/yr. fixed cost with 400,000 units =
$.50/unit
$200,000/yr. fixed cost with 800,000 units = $.25/unit
The financial challenge for the manufacturer
is
threefold:
- To reduce direct costs (labor and
materials) by
increasing productivity;
- To control semi-variable costs on the
plant floor;
and
- To expand production while holding fixed
costs
constant.
Each unit of production has to bear its share of
all of the
costs, a total which includes (a.) the direct
labor time
and material for each unit, plus (b.) the
manufacturing overhead costs, plus (c.) the
Selling, General, and Administrative
expenses.
Dividing the budgeted annual total for b. and c. by
the
projected number of units to be produced for the
year
establishes the burden rate. This plus the
direct costs
(a.) provides an approximate unit cost, which means
that
selling out the production run should cover all of the
expenses,
if the price is right.
The selling price for the product, net of all
discounts
and allowances, has to cover the total of these
three
elements, plus a provision for income taxes and net
profit.
It really is as simple as that, even when there
are
multiple products, a variety of distribution channels,
inventory
valuation issues, and subcontracted work to be
accounted for.
The key is to account for all of the costs on a
timely basis,
to budget overhead expenses, and to compare the
projections
with the actual results each month to maintain
control.
The pay-off for the manufacturer who
knows his/her
costs and is committed to controlling them within the
projected
revenue is a quantitative result — a
positive bottom line. The pay-off for The
Wedding
Producer when the bills come in after the
wedding is to
have no surprises and to relish the qualitative
result
— it was worth every cent!
