Cost Classification(fixed cost and variable cost) and BEP
-
Upload
prosenjit-banerjee -
Category
Economy & Finance
-
view
2.207 -
download
1
description
Transcript of Cost Classification(fixed cost and variable cost) and BEP
Cost Accounting
Classification of Cost
Cost (basis of variability)
Fixed Cost Variable CostSemi variable
Cost
Fixed Cost Associated with those inputs which do not
vary with changes in volume of output or activity with in a specified range of activity or output(relevant range) for a given budget period.
Remains constant whether activity increases or decreases with in a relevant range.
Example : Rent of factory, senior executive’s salaries remain same whether there is increase or decrease in volume of activity.
Fixed cost is subject to change over a period of time. Example: Rent of factory may increase after
cercertain time. Remains unaffected by volume changes
Total Fixed Cost Production(in units)
Average Fixed Cost
10000 1000 10
10000 2000 5
10000 5000 2
10000 10000 1
1000 2000 5000 100000
2000
4000
6000
8000
10000
12000
Total Fixed Cost
Total Fixed Cost
Units of Products
1000 2000 5000 100000
2
4
6
8
10
12
Average Fixed Cost
Average Fixed Cost
Increase in volume means fixed cost per unit gets progressively smaller.
Variation in unit fixed cost creates problems in product costing.
Cost being depended on number of units produced. This aspect has been referred to as trouble some fixed costs.
Organization often view fixed cost as either Committed or Discretionary fixed cost.
Commited Fixed Cost Fixed costs caused by the purchase of
capacity producing assets such as plant and equipment are called as commited cost.
It can not be easily changed on short run without having significant impact on organisation.
Depreciation, rent, property taxes are some of its examples.
Discretionary Fixed Cost
Also known as programmed costs or managed cost.
These are cost caused by management policy decision to undertake activities such as research & development, training for employees, advertising and sale promotion and so on are Discretionary Fixed Cost.
It can be reduced substantially for a given year in difficult times.
Management can cut Discretionary Fixed cost when profit declines. Example : Stop advertising in news paper
It’s amount is decided by top management at beginning of budget.
It can be changed in short run.
Variable Costs Tends to vary in direct proportion. Changes with production and sales activity.
Production
Material Cost
Labour Cost
Total Variable Cost
1 5 2 7
10 50 20 70
100 500 200 700
1000 5000 2000 7000
1 10 100 10000
1000
2000
3000
4000
5000
6000
7000
8000
Total Variable Cost
Total Variable Cost
Total Variable Cost
Productions
TVC
Cost
Semi Variable Costs Also known as Mixed Cost All costs which are neither perfectly variable
nor absolutely fixed in relation to volume changes
It consists of Fixed Cost and Variable Cost Example : Telephone Bill
0 1 2 30
5
10
15
20
25
30
Series 1
Series 1
Fixed Rental Charges
Minutes of Call
Price
0
Total Mixed Cost= Total Fixed Cost+(Unit variable cost X number of units)
Break-Even Analysis Also Known as CVP (Cost Volume Profit
Analysis) It is a technique to formulate profit planning. It’s an analytical technique for studying the
relationship between production costs and revenue.
It answers “What’s the amount need to be sold to cover all the costs”
Break Even Point Break-Even Point is the point where you
neither make nor lose money. Break-Even Point is the point where total cost
is equal to revenue. The breakeven point has three simple
elements: Includes fixed costs and variable costs. Includes revenue Assumes profit of zero.
Sales=variable cost+ fixed cost+ profit At breakeven there is no profit
Breakeven sales=variable cost+ fixed cost
Limitation Of Break Even Analysis Costs are either fixed or variable Fixed and variable costs are clearly
discernable over the whole range of output Short term analysis Difficult to use by multiple product producing
firm Assumes that the quantity of goods produced
is equal to the quantity of goods sold
Contribution Margin It is a cost accounting concept that allows a
company to determine the profitability of individual products.
It indicates why operating income changes as the number of units sold changes.
Contribution Margin = Total revenue – Variable cost
Contribution Margin per unit = Selling price/unit-Variable cost/unit
Contribution Margin Ratio = Total Contribution Margin/Total Revenue
Profit/Loss = Total contribution Margin-Total fixed Asset PL=TR-TC TC=TFC+TVC Let C=Unit contribution Margin
P=Unit RevenueV=Unit Variable Cost
C=P-VPL=TR-TC = P x X-(TFC+V x X) (since, TR=P x X, TVC=V
x X) = (C+V) x X-(TFC +V x X) = C x X+ V x X –TFC –V x X =C x X - TFC =TCM – TFC
(where X is the number of units)
Example
5 packages sold 40 packages sold
Revenue 10000(2000X5) 80000(2000X40)
Variable
Purchase cost = 6000 (1200*5) Purchase cost = 48000 (1200X40)
Fixed cost = 20000 Fixed Cost = 20000
Operating Income = 16000 Operating Income=12000
Contribution Margin = 4000(10000-6000)
Contribution Margin = 32000(80000-48000)