Business Calculations

Block 4
Chapter 12.1/12.4
Costs in relation to production

Input Transformation process Output

Target realization

Efficiency
Effectiveness
Unit cost
Sales revenue
Costs in relation to production

Input Transformation process Output

Target realization

Efficiency
Effectiveness
Unit cost
 Costs Sales revenue
Costs in relation to production

Input Transformation process Output

Target realization

Efficiency
Effectiveness
Unit cost
 Costs = Sales
Monetary value revenue
spent by a business for production,
products and operations.
Costs in relation to production

Input Transformation process Output

Target realization

Efficiency
Effectiveness
Unit cost
 Costs = Sales
Monetary value revenue
spent by a business for production,
products and operations.

Costs incurred during a period are not equal to cash outflows during that
period. Costs can be a change in value and don’t have to involve a cash flow.
Costs in relation to production

 Costs in relation to the output level.

2 groups:
Costs in relation to production

 Costs in relation to the output level.

2 groups:
 Fixed costs

 Variable costs
Costs in relation to production

 Costs in relation to the output level.

2 groups: Characteristics
 Fixed costs

 Variable costs
Costs in relation to production

 Costs in relation to the output level.

2 groups: Characteristics
 Fixed costs Remain constant on changing output level

 Variable costs Change depending on changing output level

Costs in relation to production

 Costs in relation to the output level.

2 groups: Characteristics
 Fixed costs Remain constant on changing output level

 Variable costs Change depending on changing output level

Can fixed costs change?

Costs in relation to production

 Costs in relation to the output level.

2 groups: Characteristics
 Fixed costs Remain constant on changing output level

 Variable costs Change depending on changing output level

Can fixed costs change? Yes. Fixed costs can change on other factor than output
level. E.g. if salaries are increasing or if you start renting an extra building.
Fixed costs

Source: The Basics of Financial Management, 5th edtion, page 270.

Variable costs

Source: The Basics of Financial Management, 5th edtion, page 267.

Variable costs

Source: The Basics of Financial Management, 5th edtion, page 268.

Costs

 Variable cost per unit

 Total variable costs

 Total Fixed costs

 Fixed cost per unit

 Total costs

Example: Output level 100 products

Variable costs € 2.-
Total fixed costs € 50.-
Total costs ??????
Estimating Cost Functions

 Marketing Strategies  Cost leadership (Porter)

 Operational
Excellence (Treacy & Wiersema)
Estimating Cost Functions

 Marketing Strategies  Cost leadership (Porter)

 Operational
Excellence (Treacy & Wiersema)

 Goal  Producing at lower costs.

Estimating Cost Functions

 Marketing Strategies  Cost leadership (Porter)

 Operational
Excellence (Treacy & Wiersema)

 Goal  Producing at lower costs.

Complete analysis of the cost structure is a complex operation. To determine the

cost structure of the overall company, we can map production volumes and
realized costs.
Estimating Cost Functions

 Marketing Strategies  Cost leadership (Porter)

 Operational
Excellence (Treacy & Wiersema)

 Goal  Producing at lower costs.

Complete analysis of the cost structure is a complex operation. To determine the

cost structure of the overall company, we can also map production volumes and
realized costs.
Estimating Cost Functions

Cost behaviour: Check if the variable costs have a lineair or

propoertional
progression.

Lineair  Total cost = fixed costs + output level x variable cost

per unit

Progressive  High-low method (E12.4)

K12.6

 Rank these costs in order of suitability for cut-backs at short notice.

 Rent company premises

 Salaries
 Costs of opertional lease contracts
 Advertising
 Remuneration of temporary staff
 Cost of financial lease contracts
K12.6

 Rank these costs in order of suitability for cut-backs at short notice.

Ranked:
 Remuneration of temporary staff
 Costs of opertional lease contracts
 Advertising
 Salaries
 Rent company premises
 Cost of financial lease contracts
E12.4
E12.4
a.
highest total cost – lowest total cost
variable costs = highest production – lowest production
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25

b.
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25

b.
This method assumes a proportional development of variable costs.
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25

b.
This method assumes a proportional development of variable costs.
Fixed costs = total costs – (variabel costs x quantity)
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25

b.
This method assumes a proportional development of variable costs.
Fixed costs = total costs – (variabel costs x quantity) = € 11,500 – (€ 1.25 x 5,200) = € 5,000 per month
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25

b.
This method assumes a proportional development of variable costs.
Fixed costs = total costs – (variabel costs x quantity) = € 11,500 – (€ 1.25 x 5,200) = € 5,000 per month

c.
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25

b.
This method assumes a proportional development of variable costs.
Fixed costs = total costs – (variabel costs x quantity) = € 11,500 – (€ 1.25 x 5,200) = € 5,000 per month

c.
estimated sales x variable costs + fixed costs =
E12.4
a.
highest total cost – lowest total cost € 11,500-
€ 9,875
variable costs = highest production – lowest production = 5,200 - 3,900 =
€ 1,25

b.
This method assumes a proportional development of variable costs.
Fixed costs = total costs – (variabel costs x quantity) = € 11,500 – (€ 1.25 x 5,200) = € 5,000 per month

c.
estimated sales x variable costs + fixed costs = 3,600 x € 1,25 + € 5,000 = € 9,500
Selfstudy

 E12.5
E12.5
E12.5
a.
highest total cost – lowest total cost
variable costs = highest production – lowest production
E12.5
a.
highest total cost – lowest total cost € 112,000-
€ 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20
E12.5
a.
highest total cost – lowest total cost € 112,000-
€ 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20

Fixed costs = total costs – (variabel costs x quantity)

E12.5
a.
highest total cost – lowest total cost € 112,000-
€ 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20

Fixed costs = total costs – (variabel costs x quantity) = € 64,000 – (€ 3,20 x 15,000) = € 16,000 per week
E12.5
a.
highest total cost – lowest total cost € 112,000-
€ 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20

Fixed costs = total costs – (variabel costs x quantity) = € 64,000 – (€ 3,20 x 15,000) = € 16,000 per week

b.
This method assumes a proportional development of variable costs.
E12.5
a.
highest total cost – lowest total cost € 112,000-
€ 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20

Fixed costs = total costs – (variabel costs x quantity) = € 64,000 – (€ 3,20 x 15,000) = € 16,000 per week

b.
This method assumes a proportional development of variable costs.

c.
highest total cost – lowest total cost
variable costs = highest production – lowest production
E12.5
a.
highest total cost – lowest total cost € 112,000 -
€ 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20

Fixed costs = total costs – (variabel costs x quantity) = € 64,000 – (€ 3,20 x 15,000) = € 16,000 per week

b.
This method assumes a proportional development of variable costs.

c.
highest total cost – lowest total cost € 138,000 -
€ 33,000
variable costs = highest production – lowest production = 35,000 - 10,000 =
€ 4,20
E12.5
a.
highest total cost – lowest total cost € 112,000 - € 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20

Fixed costs = total costs – (variabel costs x quantity) = € 64,000 – (€ 3,20 x 15,000) = € 16,000 per week

b.
This method assumes a proportional development of variable costs.

c.
highest total cost – lowest total cost € 138,000 - € 33,000
variable costs = highest production – lowest production = 35,000 - 10,000 =
€ 4,20
Fixed costs = total costs – (variabel costs x quantity)
E12.5
a.
highest total cost – lowest total cost € 112,000 - € 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3,20

Fixed costs = total costs – (variabel costs x quantity) = € 64,000 – (€ 3,20 x 15,000) = € 16,000 per week

b.
This method assumes a proportional development of variable costs.

c.
highest total cost – lowest total cost € 138,000 - € 33,000
variable costs = highest production – lowest production = 35,000 - 10,000 =
€ 4,20
Fixed costs = total costs – (variabel costs x quantity) = € 138,000 – (€ 4,20 x 35,000) = € 9,000 negative
E12.5
a.
highest total cost – lowest total cost € 112,000 - € 64,000
variable costs = highest production – lowest production = 30,000 - 15,000 =
€ 3.20

Fixed costs = total costs – (variabel costs x quantity) = € 64,000 – (€ 3,20 x 15,000) = € 16,000 per week

b.
This method assumes a proportional development of variable costs.

c.
highest total cost – lowest total cost € 138,000 - € 33,000
variable costs = highest production – lowest production = 35,000 - 10,000 =
€ 4.20
Fixed costs = total costs – (variabel costs x quantity) = € 138,000 – (€ 4,20 x 35,000) = € 9,000 negative