1. 1 Variable Costing  Variable costing –Allows for short-term decision-making which is a reaction to current changes in quantities demanded or supplied –Costs are subdivided into variable costs and fixed costs  Variable costs –Their amount is dependant on the quantity of production –They change in direct proportion to production quantity  Fixed costs –Costs which stay the same for a certain level of production or sales, are independent of changes in these quantities  Mixed costs –Contain elements of both fixed and variable costs

2. 2 Accounting model of costs behavior Costs Level of activity Fixed costs Total costs Variable costs Economic total cost Significance level

3. 3 P/L Statement using total costs Sales Revenue - Costs of good sold = Gross margin from sales - Selling and administration costs = Income from sales

4. 4 Costs according total costing Costs Production costs Non-production costs Indirect production costs Direct labor Direct material Goods in progress Finished goods Administration costs Selling costs P/L Statement Balance sheet solo mentor

5. 5 P/L Statement using variable costing Sales Revenue - Variable costs of good sold - Variable costs of selling & administration = Cover Margin - Fixed production costs - Fixed selling & administration costs = Income from sales

6. 6 Costs according to variable costing Costs Production costs Non-production costs Variable indirect production costs Direct labor Direct material Goods in progress Finished goods Administration costs Selling costs P/L Statement Balance sheet solo mentor Indirect production Costs Fixed indirect Production costs

7. 7 Example: Variable costing  Enterprise manufactures and sells a product. Over the last three quarters manufacture and sales were as follows: Quarter IQuarter IIQuarter III Sales manufacture1 500 1 000 1 500 1 000  Cost: 10 zł/szt.  Costs: Components for manufacture4 Labor1 Variable costs (per unit)5 Indirect manufacture labor2 000 Amortization and upkeep of machines2 500 Selling costs200 Administration costs300 Total costs5 000 Rachunek kosztów zmiennych

8. 8 Cost measurement and benefits of decision- making  Significant information –Information about amounts, which will change in the future as a result of decision-making –Informs about financial result of a decision taken  Takes into account non-financial factors  Takes into account lack of access to information and costs of gathering information  Results from data analysis of: quality variables, behavioral variables, organizational internal variables  Assesses the impact of decisions' taken on organizational environment

9. 9 Example: Significant information  Enterprise manufactures white porcelain of one standard type, without any decorations. Monthly manufacture and sales for on-going clients amounts to 100t of porcelain. 1 kg100 t Revenue5,00500 000 Costs:  Usage of raw materials  Production costs*  Other indirect cost** Total costs 2,00 1,00 0,50 3,50 2000 000 100 000 50 000 350 000 Income1,50150 000 *Production costs for machinery are fixed for 80-100t of manufacture **Costs of production space and maintenance are fixed for 80-100t. of manufacture  Problem: In the next month an on-time demand decrease for on-going customers of 20% is expected. How should the production capacities be utilized: –on standard order such as for typical clients –on special order of 10t of porcelain - non-standard production Wykorzystanie informacji istotnej

10. 10 Information about a taken decision  Incremental/ Differential costs and revenues –Additional costs and revenues, which can be avoided or created as a result of taking particular decision on action to be undertaken –Any cost that is present under one alternative but is absent in whole or in part under another alternative  Sunk costs –Costs resulting from decisions taken in the past that cannot be changed as a result of present or future decisions

11. 11 Benefits of opportunity costs  Benefits of opportunity costs –Opportunity costs result from not taking the best alternative decision  Example: –Foregone benefits  Lost revenue from unsold 20t of white porcelain (5,00 zł x 20 000 kg)100 000  Savings of raw materials from unsold 20t of white porcelain (2,00 zł x 20 000 kg) -40 000  Foregone benefit costs60 000 –Calculation  Revenue from sale of special design 80 000  Costs: benefits foregone60 000 starting a manufacture process5 000 usage of raw materials 20 000 logo painting 10 000 transport to the buyer3 000 die utilization 2 000 -20 000

12. 12 Problems with measuring costs in decision- making  Including non-significant data in the information  Exclusion of significant costs  Exclusion of opportunity costs  Decision costing –E.g. when taking outsourcing decisions