Variable Costing Variable costing Allows for shortterm decisionmaking

Variable Costing § § Variable costing – Allows for short-term decision-making which is a reaction to current changes in quantities demanded or supplied – Costs are subdivided into variable costs and fixed costs Variable costs – Their amount is dependant on the quantity of production – They change in direct proportion to production quantity Fixed costs – Costs which stay the same for a certain level of production or sales, are independent of changes in these quantities Mixed costs – Contain elements of both fixed and variable costs 1

Accounting model of costs behavior Costs Economic total cost Total costs Variable costs Fixed costs Significance level Level of activity 2

P/L Statement using total costs Sales Revenue - Costs of good sold = Gross margin from sales - Selling and administration costs = Income from sales 3

Costs according total costing Costs Production costs Direct material Direct labor Goods in progress Non-production costs Selling costs Indirect production costs Finished goods solo mentor Administration costs P/L Statement Balance sheet 4

P/L Statement using variable costing Sales Revenue - Variable costs of good sold - Variable costs of selling & administration = Cover Margin - Fixed production costs - Fixed selling & administration costs = Income from sales 5

Costs according to variable costing Costs Production costs Non-production costs Indirect production Costs Direct material Direct labor Goods in progress Variable indirect production costs Selling costs Administration costs Fixed indirect Production costs Finished goods solo P/L Statementor Balance sheet 6

Example: Variable costing § Enterprise manufactures and sells a product. Over the last three quarters manufacture and sales were as follows: Sales manufacture § § Quarter III 1 500 1 000 Cost: 10 zł/szt. Costs: Components for manufacture Labor Variable costs (per unit) Indirect manufacture labor Amortization and upkeep of machines Selling costs Administration costs Total costs 4 1 5 2 000 2 500 200 300 5 000 Rachunek kosztów zmiennych 7

Cost measurement and benefits of decisionmaking § Significant information – Information about amounts, which will change in the future as a result of decision-making – Informs about financial result of a decision taken § Takes into account non-financial factors § Takes into account lack of access to information and costs of gathering information § Results from data analysis of: quality variables, behavioral variables, organizational internal variables § Assesses the impact of decisions' taken on organizational environment 8

Example: Significant information § Enterprise manufactures white porcelain of one standard type, without any decorations. Monthly manufacture and sales for on-going clients amounts to 100 t of porcelain. Revenue 1 kg 100 t 5, 00 500 000 Costs: §Usage of raw materials §Production costs* §Other indirect cost** Total costs 2, 00 1, 00 0, 50 3, 50 2000 100 000 50 000 350 000 Income 1, 50 150 000 Wykorzystanie informacji istotnej *Production costs for machinery are fixed for 80 -100 t of manufacture **Costs of production space and maintenance are fixed for 80 -100 t. of manufacture § Problem: In the next month an on-time demand decrease for on-going customers of 20% is expected. How should the production capacities be utilized: – on standard order such as for typical clients – on special order of 10 t of porcelain - non-standard production 9

Information about a taken decision § Incremental/ Differential costs and revenues – Additional costs and revenues, which can be avoided or created as a result of taking particular decision on action to be undertaken – Any cost that is present under one alternative but is absent in whole or in part under another alternative § Sunk costs – Costs resulting from decisions taken in the past that cannot be changed as a result of present or future decisions 10

Benefits of opportunity costs § § Benefits of opportunity costs – Opportunity costs result from not taking the best alternative decision Example: – Foregone benefits § Lost revenue from unsold 20 t of white porcelain (5, 00 zł x 20 000 kg) 100 000 § Savings of raw materials from unsold 20 t of white porcelain (2, 00 zł x 20 000 kg) -40 000 § Foregone benefit costs 60 000 – Calculation § Revenue from sale of special design 80 000 § Costs: benefits foregone 60 000 starting a manufacture process 5 000 usage of raw materials logo painting 10 000 transport to the buyer 3 000 die utilization 2 000 20 000 -20 000 11

Problems with measuring costs in decisionmaking § § § Including non-significant data in the information Exclusion of significant costs Exclusion of opportunity costs § Decision costing – E. g. when taking outsourcing decisions 12