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Cost classifications, terms and purposesCost behaviour: Fixed and Variable CostsContribution Margin - Breakeven point
Cost-Volume-Profit analysis
Planning & Control
Definition of cost
Cost – the monetary value of the resources sacrificed to
achieve a specific objective
Cost Object – anything for which a separate
measurement of costs is desired (e.g., product, service,
project, activity, department, etc).
Product – a bicycle
Service – an airline flight from Manchester to Rome
Project – an airplane assembled by Airbus for BA
Activity – a test to determine the quality of a car
Department – the resources consumed by the marketing dpt.
2
Different Costs Classification for different purposes
Cost behavior in relation to Output
*Fixed and *Variable Costs
Assignment to Cost Object
*Direct and *Indirect Costs
3
Different Costs Classification for different purposes
4
Cost behavior in relation to Output
*Fixed and *Variable Costs
Assignment to Cost Object
*Direct and *Indirect Costs
Financial statement perspective
*Product (capitalized) and *Period Costs
Business Function
*Manufacturing (raw material, labor, other manufacturing costs)
*Non-Manufacturing: (marketing, distribution, customer service, legal)
BREAK-EVEN POINT AND
COST-VOLUME-PROFIT ANALYSIS
COSTING SYSTEMS – 1ST PART
JOB COSTING AND PROCESS COSTING
COSTING SYSTEMS – 2ND PART
ACTIVITY-BASED COSTING
5
FIXED COSTS - Costs that (in total) do not change with changes in the
level of production (output) over short periods of time.
0
5,000
10,000
15,000
$20,000
0 400 500 800 1000
Production (Q)
in number of units
Fix
ed
Co
sts
(F
C)
FC = $10,000
Cost behavior in relation to Output: Fixed Costs
6
Examples of fixed costs include:
• Rent of buildings
• Salary paid to a supervisor
• Insurance and leasing of a plant
• Depreciation of a machine calculated on a straight-
line basis
Note: a fixed cost is by definition “unchanged” over a given
period of time, but it may vary in the longer term (where we
may change our production capacity, i.e. build another plant,
employ more supervisors, etc.)
Cost behavior in relation to Output: Fixed Costs
7
However… FIXED COSTS per unit of output decrease as the level of production (output) increases
0
10
$ 25
0 400 500 800 1000
Production (Q)
in number of units
Fix
ed
Co
sts
pe
r u
nit
(F
C/Q
)
20
$ 25
20
12.5
10
FC = $ 10,000
Cost behavior in relation to Output: Fixed Costs
8
Vari
ab
le C
os
ts(V
C)
VC = $5 * Q
Slope = 5
$10,000
$30,000
0
10,000
20,000
30,000
$40,000
200 400 600 800 1,000
Production (Q)
in number of units
VARIABLE COSTS - Costs that (in total) change in proportion to
changes in the level of production (output)
Cost behavior in relation to Output: Variable Costs
$20,000
9
Examples of variable costs include:
• Material used
• Labor costs
• Commission paid to a sales person
Cost behavior in relation to Output: Variable Costs
10
Va
riab
le C
osts
per
un
it
(VC
/Q)
1
2
3
4
$ 5
0 200 400 600 800 1,000
Production (Q)in number of units
VC/Q = $ 5 per unit
VARIABLE COSTS per unit of output are assumed to be constant as
the level of production (output) changes.
Cost behavior in relation to Output: Variable Costs
Cost behavior in relation to Output: Semi-variable costs
Semi-variable costA cost which is partially fixed and partially varies with the changes in the
level of quantity (activity)
Examples: telephone costs; fixed lump sum plus costs for the calls –
IT help desk; fixed basic charge plus a variable element depending
on the number of call-outs
Ele
ctr
icit
y C
ost
0
20
40
60
80
100 200 300 400
Production (Q)
100
Variable cost element
Fixed cost element
The slope of this
line is the
variable cost per
unit
Cost behavior in relation to Output: Step costs (“costi a gradini”)
Production Level (Q)
Co
st
(C)
A cost which is fixed over a certain range of production (quantity)
but then increases as the capacity (and the usage of a particular
activity) increases
13
Contribution Margin (CM) analysis
Contribution Margin (in total)
TOTAL REVENUES – TOTAL VARIABLE COSTS
…what is left from the revenues after having covered the variable costs...
(1) to cover the Fixed Costs, and
(2) “to get” some profit.
Contribution Margin (per unit)= Selling price – variable cost per unit
14
Break-even pointTC = TR
FC + (VCu X Q*) = SP X Q*
FC = SP X Q* - (VCu X Q*)
FC = Q* (SP - VCu)
FC
(SP - VCu)
Cost-Volume-Profit (CVP) analysis:
break-even point
Q* =FC
Contribution
Margin per unit
=
15
Total cost equation ... TC = FC + (VCu X Q)where
TC = total cost
FC = fixed costs
VCu = variable cost per unit of production
Q = quantity of production
Total revenue equation ... TR = SP X Q
where
TR = total revenue
SP = selling price per unit
Q = quantity of unit sold*
(*unit sold = unit produced)
Cost-Volume-Profit (CVP) analysis
16
Co
sts
(C
)
0
10,000
20,000
30,000
40,000
200 400 600 800 1,000
Production (Q)
in units of production
$50,000
Variable cost
Fixed cost
Cost-Volume-Profit Analysis
Total Costs (TC) = Fixed (FC) + Variable (VC)
TC= FC+VC
TC = FC + (VCunit * Q)TC
17
Co
sts
(C
)
0
10,000
20,000
30,000
40,000
200 400 600 800 1,000
Production (Q)
in units of production
$50,000
Variable cost
Fixed cost
Cost-Volume-Profit Analysis
Total Revenues (TR) = SP * Q
TC= FC+VC
TC = FC + (VCunit * Q)
TC
TR
TR= SP * Q
18
Co
sts
(C
)
0
10,000
20,000
30,000
40,000
200 400 600 800 1,000
Production (Q)
in units of production
$50,000
Variable cost
Fixed cost
Cost-Volume-Profit Analysis
TC= FC+VC
TC = FC + (VCunit * Q)
TC
TRTR= SP * Q
BEP
Q*
19
Co
sts
(C
)
0
10,000
20,000
30,000
40,000
200 400 600 800 1,000
Production (Q)
in units of production
$50,000
Variable cost
Fixed cost
Cost-Volume-Profit Analysis
TC= FC+VC
TC = FC + (VCunit * Q)
TC
TRTR= SP * Q
BEP
Q*
20
CVP analysis:
Example
Fixed costs per annum £ 60 000
Unit selling price £ 20
Unit variable cost £ 10
Relevant range 4 000 - 12 000 units
• Break-even point (in units) = Fixed costs
Contribution per unit
= £60 000/£10 = 6 000 units (within the relevant range)
• Units to be sold to obtain a desired (£40 000) profit:
Fixed costs + desired profit = £100 000/£10 = 10 000 units
Contribution per unit
Example : Cost-Volume-Profit Analysis
BREAK EVEN POINT
level of output
at which TC = TR