Marine Business Management

Costing

Costing

Topics to be covered:
costing basic cost elements cost concepts Break-even Analysis

Costing

What is Costing? A field of study dealing with the identification and quantification of the costs associated with an activity, product, or process.

Costing - Basic Cost Elements

Total

Cost of a Product

Production Costs + Sales Costs + Administrative Costs

Production Costs
Direct

(or Prime) Costs + Indirect (or Factory Overhead) Costs

Direct (or Prime) Costs

Direct Material Cost

costs of materials used directly in the product, service or activity costs of labour involved directly in creating product or providing service

Direct Labour Cost

Indirect Costs

Indirect Material Costs

costs of material not directly used in the product or service costs of labour not directly involved in creating product or providing service

Indirect Labour Costs

Indirect Costs

Other Overheads
all indirect costs other than material and labour examples are: rent, insurance, depreciation, utilities, and the salaries of the Supervisor and maintenance staff.

Overheads

Variable Overheads
those overhead costs that vary with the level or volume of production or service e.g. power costs for operating production machinery

Overheads

Fixed Overheads
those overhead costs that remain unchanged regardless of the level or volume of production or service e.g. rent and depreciation costs

Sales Costs

The costs incurred in marketing and selling products or services e.g. advertising, promotions, freebies, salaries, company cars and commissions for sales staff

Administrative Costs

The costs incurred in administering the business. e.g. office and clerical equipment, accounting, human resources.

Variable Costs

Those costs that vary with the level or volume of production or service

e.g. direct material costs, direct labour costs, variable factory overhead costs

Major components are labour and materials

Fixed Costs

Those costs that remain constant despite changes to the level or volume of production or service

e.g. fixed factory overhead costs, fixed sales costs, and fixed administrative costs

Fixed costs continue even if no units are produced.

Marginal Cost

The additional cost of producing an additional unit. Marginal Cost = Variable Cost

Profit (or Loss)

The difference between the values of Total Sales Revenue and Total Costs ( Fixed and variable costs). Profit is when Total Sales > Total Costs Loss is when Total Sales < Total Costs

Contribution

The difference between Sales (Revenue) and Marginal Cost. The portion of the unit selling price above and beyond the variable costs that is used to meet fixed costs and make a profit.
Sales - Marginal Cost = Contribution Contribution = Fixed cost + Profit (or Loss)

Costing

Break-even Analysis

(Cost-Volume-Profit Analysis)

To break even, Sales = Total Cost Assists in planning and decision-making Carried out by:
calculation graphical method

Costing - Break-even Analysis

Assumptions Fixed costs are constant. Variable costs vary proportionately with production output. Production volume is the only factor affecting costs and sales. Technology, production method and efficiency dont change.

Costing - Break-even Analysis

The assumptions we make for break-even analysis are not true. For example:
the cost of material will vary with time - usually by increasing; volumes of materials purchased will be determined by the discounts offered, etc.

BEA is still a useful tool for costing purposes.

Costing - Break-even Analysis

Calculation for Break-even Analysis At the Break-even Point (BEP)

Sales = Total Cost = Fixed + Variable Costs

Px = F + Vx
P = unit selling price, x = no. of units produced F = fixed costs, V = unit variable costs

Costing - Break-even Chart

Total Revenue Line

Costs and Revenues (in dollars)

Profit Breakeven Point

Total Cost Line

Variable Costs

Loss
Fixed Costs

0
Output (in units)

Costing - Break-even Chart

J
Total Revenue Line

Costs and Revenues (in dollars)

Profit Breakeven Point E I H D M

Margin of Safety

Total Cost Line

K
Variable Costs

G Loss

L
Fixed Costs

A C
Output (in units)

Costing - Break-even

Limitations of Break-even Analysis Arise from the assumptions that:

unit variable costs are constant; fixed costs are constant; price per unit is constant; costs are either fixed or variable.