COST ANALYSIS

COST
Necessary expenses in an enterprise.
The Monetary Amount of the
resources given up or sacrificed to
attain some objective such as
acquiring goods and services.

COST CLASSIFICATION
1. Variable Costs
2. Fixed Costs
3. Mixed Costs

COST CLASSIFICATION
1. Variable Costs
Are expenses incurred in
production that tend to change
directly as production changes.
2. Fixed Costs
Are expenses that do not change
or vary with production.
Regardless of the production
level, whether it increases or
decreases.
3. Mixed Costs
Has both variable and fixed
component.

FIXED COSTS
VARIABLE COSTS
Direct materials
Piece rate labour
Production
supplies
Billable staff
wages
Commissions
Credit card fees

Amortization
Depreciation
Insurance
Interest Expense
Property Taxes
Rent

Mixed Cost Formula

Y=a+bX
Where: ( Y ) = The total costs
(dependent
variable)
( a ) = The total fixed
costs
( b ) = The variable cost per
unit
( X ) = The activity
(independent
variable)

COST BEHAVIOR

Fixed

Variable

Mixed

Cost Behavior is the relationship

between cost and activity, their behavior
will tell us as how they react to changes
in activity
TOTALlike production.
PER UNIT AMOUNT
AMOUNT
Constant
Increases as
production
increases
Increases less
proportionately
as production
increases

Decreases as production
increases
Constant
Decreases less
proportionately as
production increases

Application 1:
A.
Sharron
Company
manufactures and sells single
product. A partially completed
schedule of companys total and
per unit costs over a relevant
range of 60 to 100 units produced
each year is given below:

Units Produced
60 80 100
TOTAL
AMOUNT:
A. Variable
costs
B. Fixed
costs
C. Total
costs
COSTS PER

600
120
720

160
600
?
760

200

600

2?
10

?2
7.5

?
800

?
2
6

CO

CONTRIBUTION
MARGIN

Contribution represents the portion of sales

revenue that is not consumed by variable costs
and so contributes to the coverage of fixed costs.
- Incost volume profit analysis, contribution
margin the marginal profit per unit saleis a
useful
quantity in carrying out various
calculations, and can
be used as a measure
ofoperating leverage.

Contribution Margin Method

or Formula Approach
IF THERE IS
INCREASE IN:

THEN PROFIT
WILL:

Selling Price

Increase

Unit Variable Cost

Decrease

Fixed Cost

Decrease

Volume
(Unit Sales)

Increase

Contribution Margin Method or

Formula Approach
Sales
xx
Less: Variable Cost xx
Contribution Margin xx
Less: Fixed Cost
xx
Profit
xx