Summary BE2
Chapter 11: Cost structure
Fixed costs: do not change when production changes
Variable costs: change when the production changes
Depreciation is a fixed cost when it is caused on the passing of time: depreciation per year. It is
however a variable cost when it is caused by the use of the asset instead of time. E.g.: A van
depreciates per year fixed costs, the fuel costs of the van depend on the driven kilometres
variable costs
Fixed costs: do not change in relation to the output level in a short period of time. However when big
changes occur in longer than a year, fixed costs could change. As fixed costs are unrelated to the
production level, costs will decrease when production increases.
Proportionally variable costs: for each unit produced, the variable costs will always remain equal.
Degressively variable costs: the costs increase relatively less compared to production unit costs
decline
Progressively variable costs: the costs increase relatively faster than the produces quantity
increase of unit costs.
TOTAL COSTS UNIT COSTS
1. FIXED COSTS Remain equal Reduce
2. PROPORTIONALLY Increase Remain equal
VARIABLE COSTS
3. DEGRESSIVELY Increase Reduce
VARIABLE COSTS
4. PROGRESSIVELY Increase Increase
VARIABLE COSTS
Formula 1: Total costs = (fixed costs + number of units) x variable costs
Break-even point: the point where a company makes neither profit or loss
Contribution margin: the difference between the selling price and the variable unit costs. This
amount is available to cover the fixed costs.
Formula 2: Break-even quantity = Fixed costs : (selling price – variable unit costs)
To be able to execute a break-even analyses, three criteria need to be met:
1. Linearity of costs and revenues:
2. One type of product
3. Production = sales
Safety margin: the most desired situation for a company is for the sales to be well above the break-
even point. The gap between actual sales and the break-even quantity is expressed by the safety
margin. It is the maximum percentage by which sales can fall and not reach a point lower than break-
even level. The safety margin indicates a scope and has a signalling function.
Formula 3: Safety margin = (actual sales – break-even sales) : actual sales
= … % if sales drop by this percentage, break-even point is reached
, Chapter 12: Cost calculati ons
Absorption costing
Absorbing means including. So with the term absorption costing is meant that both fixed and
variable costs have to be included in the costs per product.
Question: how can you establish the fixed as well as the variable costs per product?
Answer: by realizing that total fixed costs are based on capacity (which is based on normal
production) and that total variable costs are based on actual production
Suppose:
F = 90.000 $
Normal production (N) = 5000 products
V = 55.000 $
Actual production (A) = 5500 products
Costs per product:
Fixed costs depend on the normal volume, so:
F / N = € 90,,000 = € 18
Variable costs depend on the actual volume, so:
V / A = € 55,,500 = € 10
Total costs per product: € 18 + € 10 = € 28.
Mind you: in lots of exercises not V, but v (= V / A) is given, so in this case v = € 10 would be given.
This will only make calculations easier!
Volume variance arises because actual production is different from normal production and fixed
costs stay the same. In this case the extra production is 500. After having produced 5000 products all
fixed costs have been regained (5000 x 18 = 90.000), costs per unit for the 500 extra are still
calculated at 28$ (absorption cost price). With each product we gain 18$ of fixed costs, but there are
no more fixed costs to cover. Therefore the extra profit will be: 500 x 18$ = 9000$
Formula 4: Output level variance = (A-N) x F/N
If the actual output level is expressed as a percentage of the maximum available capacity, it is called
the capacity utilization rate.
Formula 5: Capacity utilization rate = (actual volume – available capacity) x 100%
Profit under absorption costing is calculated as gross profit + output level variance
Formula 6: Gross profit = actual sales x (sales price – absorption costing price)
In our example this would give:
Gross profit: 5500 x (35-28) = $38500
Volume variance = $9000
$47500
Chapter 11: Cost structure
Fixed costs: do not change when production changes
Variable costs: change when the production changes
Depreciation is a fixed cost when it is caused on the passing of time: depreciation per year. It is
however a variable cost when it is caused by the use of the asset instead of time. E.g.: A van
depreciates per year fixed costs, the fuel costs of the van depend on the driven kilometres
variable costs
Fixed costs: do not change in relation to the output level in a short period of time. However when big
changes occur in longer than a year, fixed costs could change. As fixed costs are unrelated to the
production level, costs will decrease when production increases.
Proportionally variable costs: for each unit produced, the variable costs will always remain equal.
Degressively variable costs: the costs increase relatively less compared to production unit costs
decline
Progressively variable costs: the costs increase relatively faster than the produces quantity
increase of unit costs.
TOTAL COSTS UNIT COSTS
1. FIXED COSTS Remain equal Reduce
2. PROPORTIONALLY Increase Remain equal
VARIABLE COSTS
3. DEGRESSIVELY Increase Reduce
VARIABLE COSTS
4. PROGRESSIVELY Increase Increase
VARIABLE COSTS
Formula 1: Total costs = (fixed costs + number of units) x variable costs
Break-even point: the point where a company makes neither profit or loss
Contribution margin: the difference between the selling price and the variable unit costs. This
amount is available to cover the fixed costs.
Formula 2: Break-even quantity = Fixed costs : (selling price – variable unit costs)
To be able to execute a break-even analyses, three criteria need to be met:
1. Linearity of costs and revenues:
2. One type of product
3. Production = sales
Safety margin: the most desired situation for a company is for the sales to be well above the break-
even point. The gap between actual sales and the break-even quantity is expressed by the safety
margin. It is the maximum percentage by which sales can fall and not reach a point lower than break-
even level. The safety margin indicates a scope and has a signalling function.
Formula 3: Safety margin = (actual sales – break-even sales) : actual sales
= … % if sales drop by this percentage, break-even point is reached
, Chapter 12: Cost calculati ons
Absorption costing
Absorbing means including. So with the term absorption costing is meant that both fixed and
variable costs have to be included in the costs per product.
Question: how can you establish the fixed as well as the variable costs per product?
Answer: by realizing that total fixed costs are based on capacity (which is based on normal
production) and that total variable costs are based on actual production
Suppose:
F = 90.000 $
Normal production (N) = 5000 products
V = 55.000 $
Actual production (A) = 5500 products
Costs per product:
Fixed costs depend on the normal volume, so:
F / N = € 90,,000 = € 18
Variable costs depend on the actual volume, so:
V / A = € 55,,500 = € 10
Total costs per product: € 18 + € 10 = € 28.
Mind you: in lots of exercises not V, but v (= V / A) is given, so in this case v = € 10 would be given.
This will only make calculations easier!
Volume variance arises because actual production is different from normal production and fixed
costs stay the same. In this case the extra production is 500. After having produced 5000 products all
fixed costs have been regained (5000 x 18 = 90.000), costs per unit for the 500 extra are still
calculated at 28$ (absorption cost price). With each product we gain 18$ of fixed costs, but there are
no more fixed costs to cover. Therefore the extra profit will be: 500 x 18$ = 9000$
Formula 4: Output level variance = (A-N) x F/N
If the actual output level is expressed as a percentage of the maximum available capacity, it is called
the capacity utilization rate.
Formula 5: Capacity utilization rate = (actual volume – available capacity) x 100%
Profit under absorption costing is calculated as gross profit + output level variance
Formula 6: Gross profit = actual sales x (sales price – absorption costing price)
In our example this would give:
Gross profit: 5500 x (35-28) = $38500
Volume variance = $9000
$47500
