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• Variable Cost https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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). https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Cost accounting Origins 1 Therefore, total variable cost for each coach was $300 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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: https://store.theartofservice.com/the-variable-cost-toolkit.html 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%). https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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). https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Wheat - Diseases Fungicides, used to prevent the significant crop losses from fungal disease, can be a significant variable cost in wheat production 1 https://store.theartofservice.com/the-variable-cost-toolkit.html Biomass briquettes - Cofiring 1 The process is primarily used to decrease CO2 emissions despite the resulting lower energy efficiency and higher variable cost https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Strategic sourcing - Cooperative sourcing This is especially common in IT-oriented industries due to low to no variable costs, e.g 1 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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) https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html CVP analysis 1 * Variable cost per unit https://store.theartofservice.com/the-variable-cost-toolkit.html CVP analysis - Assumptions 1 * Constant variable cost per unit; https://store.theartofservice.com/the-variable-cost-toolkit.html CVP analysis - Assumptions 1 * contribution stands for sales minus variable costs. https://store.theartofservice.com/the-variable-cost-toolkit.html CVP analysis - Assumptions 1 Therefore it gives us the profit added per unit of variable costs. https://store.theartofservice.com/the-variable-cost-toolkit.html CVP analysis - Basic graph 1 * 'V' = 'Unit variable cost' ('variable cost per unit') https://store.theartofservice.com/the-variable-cost-toolkit.html CVP analysis - Break down 1 One can decompose total costs as fixed costs plus variable costs: https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html CVP analysis - Break down 1 Subtracting variable costs from both costs and sales yields the simplified diagram and equation for profit and loss. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Profit maximization - Basic definitions 1 Fixed cost and variable cost, combined, equal total cost https://store.theartofservice.com/the-variable-cost-toolkit.html Sunk-cost fallacy 1 The variable costs for this project might include data centre power usage, etc. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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] https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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; https://store.theartofservice.com/the-variable-cost-toolkit.html Long run - Short run 1 * shut down if average variable cost is greater than price at each level of output. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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.) https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Marginal product of labour - Marginal costs Thus only variable costs change as output increases ∆C = ∆VC = ∆Lw 1 https://store.theartofservice.com/the-variable-cost-toolkit.html Profit model - Basic model 1 : w is variable costs per unit sold https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html Profit model - Model extensions 1 Notice that w (average unit production cost) includes the fixed and variable costs. https://store.theartofservice.com/the-variable-cost-toolkit.html Profit model - Production costs 1 The unit production costs (w) can be separated into fixed and variable costs: https://store.theartofservice.com/the-variable-cost-toolkit.html Profit model - Production costs 1 * v = variable costs per unit; https://store.theartofservice.com/the-variable-cost-toolkit.html Profit model - Variable-cost elements 1 Thus the variable cost v * q can now be elaborated into: https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Everyday low price - Concept 1 Hi-Lo strategies generally result in lower variable costs, since promotional retailers can move more products by offering discounts https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Yield management - Use by industry 1 The less variable cost there is, the more the additional revenue earned will contribute to the overall profit https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html Total cost 1 Consequently total cost is fixed costs (FC) plus variable cost (VC) or TC = FC + VC = Kr +wL. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Variable cost 1 Variable costs are sometimes called unitlevel costs as they vary with the number of units produced. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html No-load - United States 1 Variable costs are fixed on a percentage basis https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html Contribution margin - Construction 1 The 'Unit Contribution Margin' (C) is Unit Revenue (Price, P) minus Unit Variable Cost (V): https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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: https://store.theartofservice.com/the-variable-cost-toolkit.html 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: https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html Cost curve - Relationship between different curves 1 ** If MC is below average total cost or average variable cost, then the latter curve is falling. https://store.theartofservice.com/the-variable-cost-toolkit.html Cost curve - Relationship between different curves 1 ** If MC equals average variable cost, then average variable cost is at its minimum value. https://store.theartofservice.com/the-variable-cost-toolkit.html Semi variable cost 1 Calculate variable cost per unit https://store.theartofservice.com/the-variable-cost-toolkit.html Semi variable cost 1 Put back into highest total cost and rework variable cost to the output, leaving fixed cost. https://store.theartofservice.com/the-variable-cost-toolkit.html Semi variable cost - General form of semi-variable cost 1 * b = The variable cost per unit https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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) https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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. https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html 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). https://store.theartofservice.com/the-variable-cost-toolkit.html International One Design - One-design principles 1 With any racing yacht, the largest contributor to variable costs are the sails https://store.theartofservice.com/the-variable-cost-toolkit.html 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 https://store.theartofservice.com/the-variable-cost-toolkit.html For More Information, Visit: • https://store.theartofservice.co m/the-variable-costtoolkit.html The Art of Service https://store.theartofservice.com