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• Variable Cost
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Economies of scale
1
In microeconomics, economies of scale
are the cost advantages that enterprises
obtain due to size, with cost per unit of
output generally decreasing with
increasing scale as fixed costs are spread
out over more units of output. Often
operational efficiency is also greater with
increasing scale, leading to lower variable
cost as well.
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Data center Green datacenters
Datacenters in arctic locations where
outside air provides all cooling are getting
more popular as cooling and electricity are
the two main variable cost components.
1
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Small business Problems faced by small businesses
In addition to ensuring that the
business has enough capital, the
small business owner must also be
mindful of contribution margin (sales
minus variable costs)
1
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Scalability
1
The concept of scalability is desirable in
technology as well as business settings.
The base concept is consistent – the
ability for a business or technology to
accept increased volume without
impacting the contribution margin (=
revenue − variable costs). For example, a
given piece of equipment may have
capacity from 1–1000 users, and beyond
1000 users, additional equipment is
needed or performance will decline
(variable costs will increase and reduce
contribution margin).
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Cost accounting Origins
In the early industrial age, most of the
costs incurred by a business were what
modern accountants call "variable costs"
because they varied directly with the
amount of production. Money was spent
on labor, raw materials, power to run a
factory, etc. in direct proportion to
production. Managers could simply total
the variable costs for a product and use
this as a rough guide for decision-making
processes.
1
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Cost accounting Origins
However, with the growth of railroads,
steel and large scale manufacturing, by
the late nineteenth century these costs
were often more important than the
variable cost of a product, and allocating
them to a broad range of products lead to
bad decision making
1
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Cost accounting Origins
1
Therefore, total variable
cost for each coach was
$300
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Cost accounting Classification of costs
By Behavior: fixed, variable, semivariable. Costs are classified according
to their behavior in relation to change
in relation to production volume within
given period of time. Fixed Costs
remain fixed irrespective of changes in
the production volume in given period
of time. Variable costs change
according to volume of production.
Semi-variable Costs costs are partly
fixed and partly variable.
1
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Cost accounting Standard cost accounting
For example: if the railway coach
company normally produced 40
coaches per month, and the fixed
costs were still $1000/month, then
each coach could be said to incur an
Operating Cost/overhead of $25
=($1000 / 40). Adding this to the
variable costs of $300 per coach
produced a full cost of $325 per coach.
1
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Cost accounting Marginal costing
1
A relationship between the cost, volume
and profit is the contribution margin. The
contribution margin is the revenue excess
from sales over variable costs. The
concept of contribution margin is
particularly useful in the planning of
business because it gives an insight into
the potential profits that can generate a
business. The following chart shows the
income statement of a company X, which
has been prepared to show its
contribution margin:
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Cost accounting Marginal costing
1
Variable costs as a percentage of sales
are equal to 100% minus the contribution
margin ratio. Thus, in the above income
statement, the variable costs are 60%
(100% - 40%) of sales, or $648,000
($1'080,000 X 60%). The total contribution
margin $432,000, can also be computed
directly by multiplying the sales by the
contribution margin ratio ($1'080,000 X
40%).
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Inventory Theory of constraints cost accounting
1
Throughput accounting recognizes
only one class of variable costs: the
truly variable costs, like materials
and components, which vary directly
with the quantity produced
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Automotive engineering - Product Engineering
Cost: The cost of a vehicle program is
typically split into the effect on the variable
cost of the vehicle, and the up-front tooling
and fixed costs associated with developing
the vehicle. There are also costs
associated with warranty reductions, and
marketing.
1
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Revenue - Financial statement analysis
Gross Margin is a calculation of
revenue less cost of goods sold, and is
used to determine how well sales
cover direct variable costs relating to
the production of goods.
1
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Pricing - Elements of pricing
1
The price floor is determined by production
factors like costs (often only variable costs
are taken into account), economies of
scale, marginal cost, and degree of
operating leverage
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Monopoly - Sources of monopoly power
In addition to barriers to entry and
competition, barriers to exit may be a
source of market power. Barriers to exit
are market conditions that make it
difficult or expensive for a company to
end its involvement with a market. Great
liquidation costs are a primary barrier
for exiting. Market exit and shutdown are
separate events. The decision whether to
shut down or operate is not affected by
exit barriers. A company will shut down
if price falls below minimum average
variable costs.
1
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Monopoly - Monopolist shutdown rule
1
A monopolist should shut down when
price is less than average variable
cost for every output level. – in other
words where the demand curve is
entirely below the average variable
cost curve. Under these circumstances
at the profit maximum level of output
(MR = MC) average revenue would be
less than average variable costs and
the monopolists would be better off
shutting down in the short term.
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Recruitment process outsourcing - Benefits
1
RPO solutions are also claimed to change
fixed investment costs into variable costs
that flex with fluctuation in recruitment
activity
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Business process outsourcing - Benefits and limitations
1
21, pp 7–15 A variable cost structure helps
a company responding to changes in
required capacity and does not require a
company to invest in assets, thereby
making the company more flexible.Gilley,
K.M., Rasheed, A
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Pandora Radio - Business model
1
High variable costs mean that Pandora
does not have significant operating
leverage, and in the next couple years
might actually have negative operating
leverage due to an unfavorable shift in
product mix towards mobile
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Scalable
1
The concept of scalability is desirable in
technology as well as business settings.
The base concept is consistent – the
ability for a business or technology to
accept increased volume without
impacting the contribution margin (=
revenue minus; variable costs). For
example, a given piece of equipment
may have capacity from 1–1000 users,
and beyond 1000 users, additional
equipment is needed or performance
will decline (variable costs will increase
and reduce contribution margin).
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Demand response - Electricity pricing
1
In virtually all power systems electricity is
produced by generators that are
dispatched in merit order, i.e., generators
with the lowest marginal cost (lowest
variable cost of production) are used first,
followed by the next cheapest, etc., until
the instantaneous electricity demand is
satisfied
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Wheat - Diseases
Fungicides, used to prevent the
significant crop losses from fungal
disease, can be a significant variable
cost in wheat production
1
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Biomass briquettes - Cofiring
1
The process is primarily used to decrease
CO2 emissions despite the resulting lower
energy efficiency and higher variable cost
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Business efficiency
1
The 'efficiency ratio', a ratio that typically
applies to banks, in simple terms is
defined as expenses as a percentage of
revenue ('expenses / revenue'), with a few
variations. A lower percentage is better
since that means expenses are low and
earnings are high. It relates to operating
leverage, which measures the ratio
between fixed costs and variable costs.
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Economy of scale
In microeconomics, 'economies of
scale' are the cost advantages that
enterprises obtain due to size,
throughput, or scale of operation, with
cost per unit of output generally
decreasing with increasing scale as
fixed costs are spread out over more
units of output. Often operational
efficiency is also greater with
increasing scale, leading to lower
1
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Strategic sourcing - Cooperative sourcing
This is especially common in IT-oriented
industries due to low to no variable costs, e.g
1
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Premium-rate telephone number - Telephone numbers in Spain|Spain
Also there are other range for
information services (weather, white
pages, etc...), there are all the
numbers starting with 118, they can
have 5 or 6 digits with a variable cost
per number. 11818 is free from
Telefónica's telephone cabins.
Previously 11818 was 1003.
1
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Financial management for IT services - IT accounting
Variable Costs: Any expenses that
vary in the short-term based on the
level of services provided, resources
consumed, or other factors. For
example, energy costs are variable
based on the amount consumed.
1
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Gasoline gallon equivalent - Miles per gallon of gasoline equivalent (MPGe)
1
Charts on this page show variable costs of
electricity for the BTU equivalent of a
Gallon of Gasoline at select local retail
prices. That does not address the relative
thermal efficiency of an electric traction
motor (80% to 99%) vs the thermal
efficiency of an internal combustion engine
(15% to 25%). This is a significant
difference.
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Water supply - Costs and financing
1
The cost of supplying water consists to a
very large extent of fixed costs (capital
costs and personnel costs) and only to a
small extent of variable costs that depend
on the amount of water consumed (mainly
energy and chemicals)
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Money laundering - Methods
* Cash-intensive businesses: In this
method, a business typically involved
in receiving cash uses its accounts to
deposit both legitimate and criminally
derived cash, claiming all of it as
legitimate earnings. Service
businesses are best suited to this
method, as such businesses have no
variable costs, and it is hard to detect
discrepancies between revenues and
costs. Examples are parking
buildings, strip clubs, tanning beds,
1
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Learning curve - Examples and mathematical modelling
:This form of learning curve is used
extensively in industry for cost
projections.http://classweb.gmu.edu/aloerc
h/LearningCurve%20Basics.pdf
Department of Defense Manual Number
5000.2-M, mandates the use of learning
curves for costing of defense programs
(variable costs of production)
1
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Lifetime value - Construction
The CLV model has only three
parameters: (1) constant margin
(contribution after deducting variable
costs including retention spending) per
period, (2) constant retention probability
per period, and (3) discount rate.
Furthermore, the model assumes that in
the event that the customer is not
retained, they are lost for good. Finally,
the model assumes that the first margin
will be received (with probability equal to
the retention rate) at the end of the first
1
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Theory of constraints - Finance and accounting
1
The primary measures for a TOC view of
finance and accounting are: throughput,
operating expense and investment.
Throughput is calculated from sales minus
totally variable cost, where totally variable
cost is usually calculated as the cost of
raw materials that go into creating the item
sold.
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CVP analysis
CVP analysis expands the use of
information provided by breakeven
analysis. A critical part of CVP analysis is
the point where total revenues equal total
costs (both fixed and variable costs). At
this break-even point, a company will
experience no income or loss. This breakeven point can be an initial examination
that precedes more detailed CVP analysis.
1
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CVP analysis
1
* Variable cost per unit
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CVP analysis - Assumptions
1
* Constant variable cost per unit;
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CVP analysis - Assumptions
1
* contribution stands
for sales minus
variable costs.
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CVP analysis - Assumptions
1
Therefore it gives us
the profit added per
unit of variable
costs.
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CVP analysis - Basic graph
1
* 'V' = 'Unit variable cost'
('variable cost per unit')
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CVP analysis - Break down
1
One can decompose
total costs as fixed
costs plus variable
costs:
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CVP analysis - Break down
1
Following a matching principle of matching
a portion of sales against variable costs,
one can decompose sales as Contribution
margin|contribution plus variable costs,
where 'contribution' is what's left after
deducting variable costs. One can think of
contribution as the marginal contribution of
a unit to the profit, or contribution towards
offsetting fixed costs.
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CVP analysis - Break down
1
Subtracting variable costs from both
costs and sales yields the simplified
diagram and equation for profit and
loss.
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CVP analysis - Break down
1
Mathematically, the contribution graph is
obtained from the sales graph by a shear
mapping|shear, to be precise \left(\begin1
0\\ -V 1\end\right), where V are unit
variable costs.
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CVP analysis - Limitations
CVP is a 'short run', 'marginal'
analysis: it assumes that unit variable
costs and unit revenues are constant,
which is appropriate for small
deviations from current production
and sales, and assumes a neat
division between fixed costs and
variable costs, though in the long run
all costs are variable
1
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Fixed cost
1
In economics, 'fixed costs', 'indirect
costs' or 'overheads' are business
expenses that are not dependent on
the level of goods or services
produced by the business. They tend to
be time-related, such as salaries or
rents being paid per month, and are
often referred to as overhead costs.
This is in contrast to variable costs,
which are volume-related (and are
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Fixed cost - Areas of confusion
In business planning and management
accounting, usage of the terms fixed costs,
variable costs and others will often differ
from usage in economics, and may
depend on the context. Some cost
accounting practices such as activitybased costing will allocate fixed costs to
business activities for profitability
measures. This can simplify decisionmaking, but can be confusing and
1
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Fixed cost - Areas of confusion
1
In accounting terminology, fixed costs will
broadly include almost all costs
(expenses) which are not included in cost
of goods sold, and variable costs are
those captured in costs of goods sold
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Community-supported agriculture - Distribution and marketing methods
1
Share prices are mostly determined by
overhead costs of production, but are also
determined by share prices of other CSAs,
variable costs of production, market
forces, and income level of the community
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Proletariat - Usage in Marxist theory
1
One part of the wealth produced is used to
pay the workers' wages (variable costs),
another part to renew the means of
production (constant costs) while the third
part, surplus value is split between the
capitalist's private takings (profit), and the
money used to pay rents, taxes, interests,
etc
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Budget management - Classification of costs
1
# By Behavior: fixed, variable, semivariable. Costs are classified
according to their behavior in relation
to change in relation to production
volume within given period of time.
Fixed Costs remain fixed irrespective
of changes in the production volume
in given period of time. Variable costs
change according to volume of
production. Semi-variable Costs costs
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Budget management - Standard Cost Accounting: Setting Standards and Analyzing
Variances
:For example: if the railway coach
company normally produced 40 coaches
per month, and the fixed costs were still
$1000/month, then each coach could be
said to incur an Operating Cost/overhead
of $25 =($1000 / 40). Adding this to the
variable costs of $300 per coach produced
a full cost of $325 per coach.
1
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Project management triangle - Cost
But beyond this basic accounting
approach to fixed and variable costs, the
economic cost that must be considered
includes worker skill and productivity
which is calculated using various project
cost estimate tools
1
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Refinancing - Risks
1
If the refinanced loan has lower monthly
repayments or consolidates other debts for
the same repayment, it will result in a
larger total interest cost over the life of the
loan, and will result in the borrower
remaining in debt for many more years.
Calculating the up-front, ongoing, and
potentially variable costs of refinancing is
an important part of the decision on
whether or not to refinance.
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Cycle stocks - Theory of constraints cost accounting
1
Throughput accounting recognizes
only one class of variable costs: the
truly variable costs, like materials and
components, which vary directly with
the quantity produced
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Economic Order Quantity Model - The Total Cost function
- Purchase cost: This is the variable
cost of goods: purchase unit price
times; annual demand quantity. This is
c times; D
1
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Cost of goods sold - Alternative views
1
*Throughput Accounting, under the
Theory of Constraints, under which
only Totally variable costs are
included in cost of goods sold and
inventory is treated as investment.
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Overhead (business)
1
The term overhead is usually used when
grouping expenses that are necessary to
the continued functioning of the business
but cannot be immediately associated
with the products or services being
offered (i.e.,do not directly generate
profit
(accounting)|profits).[http://www.pmhu
t.com/pmo-and-project-managementdictionary PMO and Project
Management Dictionary] Closely
related accountancy|accounting
concepts are fixed costs and variable
costs as well as indirect costs and direct
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Profit maximization - Basic definitions
1
Fixed cost and variable cost,
combined, equal total cost
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Sunk-cost fallacy
1
The variable costs for this project might include data
centre power usage, etc.
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Financial risk - Diversification
The returns from different assets are
highly unlikely to be perfectly correlated
and the correlation may sometimes be
negative. For instance, an increase in the
price of oil will often favour a company that
produces it, but negatively impact the
business of a firm such an airline whose
variable costs are heavily based upon fuel.
1
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News Vendor Model - Cost based optimization of inventory level
1
* c_v – variable cost. This cost type expresses
the production cost of one product. [$/product]
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Alfred Marshall - Principles of Economics (1890)
1
Marshall pointed out that it is the prime or
variable costs, which constantly recur, that
influence the sale price most in this period
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Abuse of dominance - Monopolist shutdown rule
1
A monopolist should shut down when
price is less than average variable cost
for every output level – in other words
where the demand curve is entirely
below the average variable cost curve.
Under these circumstances at the profit
maximum level of output (MR = MC)
average revenue would be less than
average variable costs and the
monopolists would be better off
shutting down in the short term.
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Marginal cost - Cost functions and relationship to average cost
In the simplest case, the total cost
function and its derivative are
expressed as follows, where Q
represents the production quantity, VC
represents variable costs, FC
represents fixed costs and TC
represents total costs.
1
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Marginal cost - Perfectly competitive supply curve
1
The portion of the marginal cost curve
above its intersection with the average
variable cost curve is the supply curve
for a firm operating in a perfect
competition|perfectly competitive
market
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Marginal cost - Relationship to fixed costs
1
This can be illustrated by graphing
the short run total cost curve and the
short run variable cost curve
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Perfect competition - The shutdown point
1
In the short run, a firm operating at a
loss [R R then the firm is not even
covering its production costs and it
should immediately shut down. The
rule is conventionally stated in terms
of price (average revenue) and
average variable costs. The rules are
equivalent (If you divide both sides of
inequality TR VC the firm should shut
down.
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Perfect competition - Short-run supply curve
Technically the SR supply curve is a
discontinuous function composed of the
segment of the MC curve at and above
minimum of the average variable cost
curve and a segment that runs with the
vertical axis from the origin to but not
including a point parallel to minimum
average variable costs.Binger Hoffman,
Microeconomics with Calculus, 2nd ed
1
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Predatory pricing - Concept
There are various tests to assess
whether the pricing is predatory:
Areeda-Turner suggest it is below
Short Run Marginal Costs, the AKZO
case suggests it is costing below
Average Variable Costs, and the case
of United Brands suggests it is simply
when the difference in cost between
the cost of manufacturing and the
price charged to consumers is
1
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Long run - Short run
1
Costs that are fixed, say from existing
plant size, have no impact on a firm's
short-run decisions, since only
variable costs and revenues affect
short-run profits
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Long run - Short run
1
* continue producing if average
variable cost is less than price per
unit, even if average total cost is
greater than price;
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Long run - Short run
1
* shut down if average variable cost is greater
than price at each level of output.
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Throughput accounting - History
1
When cost accounting was developed in
the 1890s, labor was the largest fraction of
product cost and could be considered a
variable cost
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Throughput accounting - The concepts of Throughput Accounting
1
(Throughput is sometimes referred to
as throughput contribution and has
similarities to the concept of
contribution in marginal costing
which is sales revenues less variable
costs – variable being defined
according to the marginal costing
philosophy.)
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Throughput accounting - The concepts of Throughput Accounting
1
* Investment (I) is the money tied up in
the system. This is money associated
with inventory, machinery, buildings,
and other assets and liabilities. In earlier
Theory of Constraints (TOC)
documentation, the I was interchanged
between inventory and investment. The
preferred term is now only investment.
Note that TOC recommends inventory be
valued strictly on totally variable cost
associated with creating the inventory,
not with additional cost allocations from
overhead.
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Load shedding - Electricity pricing
1
In virtually all power systems electricity is
produced by generators that are
dispatched in merit order, i.e., generators
with the lowest marginal cost (lowest
variable cost of production) are used first,
followed by the next cheapest, etc., until
the instantaneous electricity demand is
satisfied
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Price elasticity of demand - Limitations of revenue-maximizing and profit-maximizing
pricing strategies
In most situations, revenuemaximizing prices are not profitmaximizing prices. For example, if
variable costs per unit are nonzero
(which they almost always are), then a
more complex computation of a
similar kind yields prices that
generate optimal profits.
1
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Marginal product of labour - Marginal costs
Thus only variable
costs change as
output increases ∆C
= ∆VC = ∆Lw
1
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Profit model - Basic model
1
: w is variable costs per unit sold
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Profit model - Model extensions
1
The basic profit model is sales minus
costs. Sales are made up of quantity
sold multiplied by their price. Costs
are usually divided between Fixed
costs and variable costs.
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Profit model - Model extensions
1
Notice that w (average unit production cost) includes
the fixed and variable costs.
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Profit model - Production costs
1
The unit production costs (w) can be separated
into fixed and variable costs:
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Profit model - Production costs
1
* v = variable costs per unit;
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Profit model - Variable-cost elements
1
Thus the variable cost v * q can
now be elaborated into:
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Operating margin
1
It is a measurement of what proportion of
a company's revenue is left over, before
taxes and other indirect costs (such as
rent, bonus, interest, etc.), after paying for
variable costs of production as wages, raw
materials, etc. A good operating margin is
needed for a company to be able to pay
for its fixed costs, such as interest on debt.
A higher operating margin means that the
company has less financial risk.
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Flu - Society and culture
1
Influenza produces variable cost|direct
costs due to lost productivity and
associated medical treatment, as well as
indirect costs of preventative measures
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Electricity sector in Peru - Installed capacity
In 2006, 72% of Peru’s total electricity
generation came from hydroelectric plants
(total generation was 27.4 TWh), with
conventional thermal plants only in
operation during peak load periods or
when hydroelectric output is curtailed by
weather
events.[http://www.eia.doe.gov/emeu/cabs
/Peru/Electricity.html EIA] This “underuse”
of the country’s thermal capacity is due to
the high variable costs of thermal
generation
1
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Price discrimination - Two necessary conditions for price discrimination
1
(Wiley 2003) Airlines typically attempt to
maximize revenue rather than profits
because airlines variable costs are small
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Third party logistics - Advantages and disadvantages of third party logistics
Third party logistics provider can
provide a much higher flexibility in
geographic aspects and can offer a much
larger variety of services than the clients
could provider their selves. In addition to
that, the client gets flexibility in
resources and workforce size and
logistics fix costs turn into variable
costs.Simchi-Levi and Kaminsky,
Designing and Managing the Supply
Chain: Concepts,Strategies and Case
Studies, third edition, McGraw-Hill
International Edition, page 251
1
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Markup (business)
1
The total cost reflects the total amount of
both Fixed cost|fixed and Variable
cost|variable expenses to produce and
distribute a Product (business)|product
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Everyday low price - Concept
1
Hi-Lo strategies generally result in lower
variable costs, since promotional retailers
can move more products by offering
discounts
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Economic cost - Components of Economic Costs
1
**Variable cost (TVC): Variable costs are
the costs paid to the variable input. Inputs
include labour, capital, materials, power
and land and buildings. Variable inputs
are inputs whose use vary with output.
Conventionally the variable input is
assumed to be labor.
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Economic cost - Components of Economic Costs
1
**Average variable cost (AVC) = variable
costs divided by output. AVC =T VC/q. The
average variable cost curve is typically Ushaped. It lies below the average cost
curve and generally has the same shape the vertical distance between the average
cost curve and average variable cost
curve equals average fixed costs. The
curve normally starts to the right of the y
axis because with zero production
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Yield management - Use by industry
1
The less variable cost there is, the more
the additional revenue earned will
contribute to the overall profit
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Absorption costing
1
A costing method that includes all
manufacturing costs—direct
materials, direct labour, and both
variable and fixed manufacturing
overhead—in unit product costs.
According to the ICMA London
Absorption costing is a principle
whereby fixed as well as variable
costs are allocated to cost unit the
term may be applied where
production costs only or costs of all
function are so allocated.
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BahnCard - Motivation
1
The card allowed a two-dimensional pricing
schedule, which consists of card price (a
fixed cost), and ticket price (a variable cost).
Once a passenger has bought a card, its
price becomes a sunk cost and this makes
the train more like the automobile, which is
also characterised by high fixed costs. The
decision whether to take a car or train for a
particular journey depends mostly on the
Marginal cost|marginal price per kilometer,
not on the total cost.
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Cost management - Origins
In the early industrial age, most of the
costs incurred by a business were what
modern accountants call variable costs
because they varied directly with the
amount of production. Money was spent
on labor, raw materials, power to run a
factory, etc. in direct proportion to
production. Managers could simply total
the variable costs for a product and use
this as a rough guide for decision-making
1
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Cost management - Origins
1
Some costs tend to remain the same even
during busy periods, unlike variable
costs, which rise and fall with volume of
work. Over time, these fixed costs have
become more important to managers.
Examples of fixed costs include the
depreciation of plant and equipment,
and the cost of departments such as
maintenance, tooling, production
control, purchasing, quality control,
storage and handling, plant supervision
and engineering.Performance
management, Paper f5. Kapalan
publishing UK. Pg 3
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Total cost
In economics, and cost accounting, 'total
cost' ('TC') describes the total economic cost
of production and is made up of variable
costs, which vary according to the quantity of
a good produced and include inputs such as
labor and raw materials, plus fixed costs,
which are independent of the quantity of a
good produced and include inputs (Capital
(economics)|capital) that cannot be varied in
the short term, such as buildings and
machinery.
1
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Total cost
1
Total cost in economics includes the
total opportunity cost of each factor of
production as part of its fixed or
variable costs.
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Total cost
1
The rate at which total cost changes as
the amount produced changes is called
marginal cost. This is also known as the
marginal unit variable cost.
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Total cost
1
If one assumes that the unit variable
cost is constant, as in cost-volumeprofit analysis developed and used in
cost accounting by the accountants,
then total cost is linear in volume, and
given by: total cost = fixed costs + unit
variable cost * amount.
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Total cost
1
Consequently total cost is fixed costs (FC) plus
variable cost (VC) or TC = FC + VC = Kr +wL.
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Total cost
Other economic models have the total
variable cost curve (and therefore total
cost curve) illustrate the concepts of
increasing, and later diminishing, marginal
returns.
1
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Variable cost
1
Variable costs are sometimes called unitlevel costs as they vary with the number of
units produced.
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Variable cost - Example 1
1
Assume a business produces clothing. A
variable cost of this product would be the
direct material, i.e., cloth, and the direct
labor. If it takes one laborer 6 yards of
cloth and 8 hours to make a shirt, then the
cost of labor and cloth increases if two
shirts are produced.
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Variable cost - Example 2
For example, a firm pays for raw
materials. When activity is decreased,
less raw material is used, and so the
spending for raw materials falls. When
activity is increased, more raw
material is used, and spending
therefore rises. Note that the changes
in expenses happen with little or no
need for managerial intervention.
These costs are variable costs.
1
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Variable cost - Example 2
1
In retail the cost of goods is almost entirely
a variable cost; this is not true of
manufacturing where many fixed costs,
such as depreciation, are included in the
cost of goods.
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Variable cost - Example 2
1
Although taxation usually varies with
profit, which in turn varies with sales
volume, it is not normally considered
a variable cost.
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Variable cost - Example 2
1
For some employees, salary is paid on
monthly rates, independent of how many
hours the employees work. This is a fixed
cost. On the other hand, the hours of
hourly employees can often be varied, so
this type of labour cost is a variable cost.
The cost of material is a variable cost.
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Even aged timber management - Economic Implications
1
Forestry operations have extremely high
variable costs- per hour expenses for
harvesting equipment and per kilometer
expenses for log transportation compose a
very large portion of the total cost to
harvest a stand
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Operational costs - Business operating costs
Variable Costs include indirect
overhead costs such as Cell Phone
Services, Computer Supplies, Credit
Card Processing, Electrical use,
Express Mail, Janitorial Supplies, MRO,
Office Products, Payroll
Services,Telecom, Uniforms, Utilities,
or Waste Disposal etc.
1
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No-load - United States
1
Variable costs are fixed on a
percentage basis
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Capitalization rate - Explanatory Examples
For example, if a building is
purchased for $1,000,000 sale price
and it produces $100,000 in positive
net operating income (the amount left
over after fixed costs and variable
costs is subtracted from gross lease
income) during one year, then:
1
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Sliding scale
1
'Sliding scale fees' are variable costs
for products, services, or taxes based
on one's ability to pay. Such fees are
thereby reduced for those who have
lower incomes or less money to spare
after their personal expenses,
regardless of income.
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Five and dime - Supply
1
In many countries, stock can be imported
from others with lower variable costs,
because of differences in wages, resource
costs or taxation. Usually goods are
imported by a general importer, then sold
to the stores wholesale.
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Contribution margin
1
“Contribution” represents the portion of
sales revenue that is not consumed by
variable costs and so contributes to the
coverage of fixed costs
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Contribution margin - Purpose
1
The contribution margin is computed by
using a contribution income statement, a
management accounting version of the
income statement that has been
reformatted to group together a business's
fixed and variable costs.
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Contribution margin - Purpose
1
Contribution is different from gross margin
in that a contribution calculation seeks to
separate out variable costs (included in
the contribution calculation) from fixed
costs (not included in the contribution
calculation) on the basis of economic
analysis of the nature of the expense,
whereas gross margin is determined using
accounting standards
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Contribution margin - Construction
1
The 'Unit Contribution Margin' (C) is Unit
Revenue (Price, P) minus Unit Variable Cost
(V):
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Contribution margin - Construction
where TC = TFC + TVC is Total Cost =
Total Fixed Cost + Total Variable Cost and
X is Number of Units. Thus Profit is Unit
Contribution times Number of Units, minus
the Total Fixed Costs.
1
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Contribution margin - Construction
1
From the perspective of the matching
principle, one breaks down the
revenue from a given sale into a part
to cover the Unit Variable Cost, and a
part to offset against the Total Fixed
Costs. Breaking down Total Costs as:
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Contribution margin - Construction
1
Thus the Total Variable Costs \text = \text
\times \text offset, and the Net Income
(Profit and Loss) is Total Contribution
Margin minus Total Fixed Costs:
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Contribution margin - Examples
Although this shows only the top half of
the contribution format income statement,
it's immediately apparent that Product Line
C is Beta's most profitable one, even
though Beta gets more sales revenue from
Line B (which is also an example of what
is called Partial Contribution Margin - an
income statement that references only
variable costs)
1
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Contribution margin - Contribution margin as a measure of efficiency in the operating
room
1
A surgical suite can schedule itself efficiently
but fail to have a positive contribution margin
if many surgeons are slow, use too many
instruments or expensive implants, etc.
These are all measured by the contribution
margin per OR hr. The contribution margin
per hour of OR time is the hospital revenue
generated by a surgical case, less all the
hospitalization variable labor and supply
costs. Variable costs, such as implants, vary
directly with the volume of cases performed.
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Cost driver
1
Generally, the cost driver for short term
indirect variable costs may be the volume
of output/activity; but for long term indirect
variable costs, the cost drivers will not be
related to volume of output/activity.
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Cost curve - Short-run average variable cost curve (SRAVC)
1
Average variable cost (which is a shortrun concept) is the variable cost
(typically labor cost) per unit of output:
SRAVC = wL / Q where w is the wage
rate, L is the quantity of labor used, and
Q is the quantity of output produced.
The SRAVC curve plots the short-run
average variable cost against the level
of output and is typically drawn as Ushaped.
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Cost curve - Short-run average total cost curve (SRATC or SRAC)
Short run average cost equals average
fixed costs plus average variable costs.
Average fixed cost continuously falls as
production increases in the short run,
because K is fixed in the short run. The
shape of the average variable cost curve
is directly determined by increasing and
then diminishing marginal returns to the
variable input (conventionally
labor).Perloff, J., 2008, Microeconomics:
Theory Applications with Calculus,
Pearson. ISBN 978-0-321-27794-7
1
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Cost curve - Long-run average cost curve (LRAC)
Natural monopolies tend to exist in
industries with high capital costs in relation
to variable costs, such as water supply
and electricity supply.
1
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Cost curve - Short-run marginal cost curve (SRMC)
The marginal cost curve intersects both
the average variable cost curve and
(short-run) average total cost curve at their
minimum points
1
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Cost curve - Cost curves and production functions
Because the production function
determines the variable cost function
it necessarily determines the shape
and properties of marginal cost curve
and the average cost curves.
1
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Cost curve - Relationship between different curves
1
*Marginal Cost (MC) = dC/dQ; MC equals
the slope of the total cost function and of
the variable cost function
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Cost curve - Relationship between different curves
1
** At a level of Q at which the MC curve is
above the average total cost or average
variable cost curve, the latter curve is
rising.
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Cost curve - Relationship between different curves
1
** If MC is below average total cost or average
variable cost, then the latter curve is falling.
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Cost curve - Relationship between different curves
1
** If MC equals average variable cost, then
average variable cost is at its minimum value.
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Semi variable cost
1
Calculate variable cost per unit
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Semi variable cost
1
Put back into highest total cost and rework variable
cost to the output, leaving fixed cost.
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Semi variable cost - General form of semi-variable cost
1
* b = The variable
cost per unit
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Semi variable cost - General form of semi-variable cost
The equation makes it very easy to
calculate what the total mixed cost or
an unknown factor(fixed cost/variable
cost/level of activity)
1
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Monopolistic - Sources of monopoly power
In addition to barriers to entry and
competition, barriers to exit may be a source
of market power. Barriers to exit are market
conditions that make it difficult or expensive
for a company to end its involvement with a
market. Great liquidation costs are a primary
barrier for exiting. Market exit and shutdown
are separate events. The decision whether to
shut down or operate is not affected by exit
barriers. A company will shut down if price
falls below minimum average variable costs.
1
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2011–12 FC Barcelona season - July
On 21 July, Barcelona completed the
transfer of Chile national football
team|Chilean Midfielder#Winger|winger
Alexis Sánchez from Italy|Italian club
Udinese Calcio|Udinese. The deal is for 5
years and the cost of the transfer is €26
million with variable cost of €11.5 million.
1
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Product Cycle - Pyramid of Production Systems
1
* cost which can be measured in terms
of monetary units and usually consists
of fixed and variable cost.
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Unit cost
1
The 'unit cost' is the cost incurred by a
company to produce, store and sell
one unit of a particular product. Unit
costs include all fixed costs and all
variable costs involved in
production.http://www.investopedia.c
om/terms/u/unitcost.asp#axzz27lgOi
ykz
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Water supplies - Costs and financing
1
The cost of supplying water consists,
to a very large extent, of fixed costs
(capital costs and personnel costs) and
only to a small extent of variable costs
that depend on the amount of water
consumed (mainly energy and
chemicals)
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Kent State University at Stark - Senior Guest Program
1
Courses taken through the Senior Guest
Program are free, however, some classes
have variable costs such as books or
special course fees
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Variable Costing
1
This artificially inflates profits in the
period of production by incurring less
cost than would be incurred under a
variable costing system.http://wwwbiz.aum.edu/janheier/ABSORB2020.h
tm ABSORPTION VS VARIABLE
COSTING LECTURE - BREAKEVEN
ANALYSIS Variable costing is
generally not used for external
reporting purposes
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Variable Costing
1
'Variable costing' - A costing method
that includes only variable
manufacturing costs--direct materials,
direct labor, and variable
manufacturing overhead--in unit
product costs.
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Pay on production - History and BackgroundMast, Wolfgang F.: Pay on
Production : langfristige Partnerschaft mit Verantwortungstransfer. In: Meier,
Horst (Hrsg.): Dienstleistungsorientierte Geschäftsmodelle im Maschinen- und
Anlagenbau : vom Basisangebot bis zum Betreibermodell. Berlin: Springer,
2004. - ISBN 3-540-40816-9. P. 15-29.
1
Most the costs incurred by the OEM in
PoP are variable costs such as labour
and materials, though there is also in
this case an additional variable cost for
the equipment for every car produced
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Free-range eggs - Cost
1
The Commission’s report concludes that,
if costs were to increase by 20%, which it
says is the type of percentage increase in
terms of variable costs that producers are
likely to face as a result of switching to
free-range, the industry will potentially
suffer a loss of producer surplus of €354
million (EU-25).
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International One Design - One-design principles
1
With any racing yacht, the largest contributor
to variable costs are the sails
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Software business
1
'Software Business' is the commercial
activity of the software industry, aimed
at producing, buying and selling
Software product lines|software
products or software services. The
business of software differs from other
businesses, in that its main good is
intangible and fixed costs of production
are high while variable costs of
production are close to zero.D.G.
Messerschmitt and C. Szyperski,
Software Ecosystem: Understanding an
Indispensable Technology and Industry,
MIT Press, 2003
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