15 June 2014
I am an exporter of leather goods. I want to know the Break Even point of my factory. but to calculate the Break Even point I want to know following;
1) what is fixed cost? 2) what is variable cost? 3) how I can get the product cost as I make various products of various cost.
15 June 2014
the costs that don't change with the change in output are referred to as fixed costs. for eg: cost of building
the costs which change with change in output are referred to as variable costs. for eg material cost
to arrive at product costs, first you need to segregate the costs that can be identified with a particular product. For eg; if you are making rubber tyres and soap, then material for rubber tyre and soap can be easily segregated.
thereafter, the remaining costs can be allocated to the products on the basis of acceptable basis. for eg, electricity charges can be on the basis of machine hours used for each product.
16 June 2014
Variable costs are corporate expenses that vary in direct proportion to the quantity of output. Unlike fixed costs, which remain constant regardless of output, variable costs are a direct function of production volume, rising whenever production expands and falling whenever it contracts. Examples of common variable costs include raw materials, packaging, and labor directly involved in a company's manufacturing process.
The formula for calculating total variable cost is:
Total Variable Cost = Total Quantity of Output x Variable Cost Per Unit of Output
The term variable cost is not to be confused with variable costing, which is an accounting method related to reporting variable costs.
How it works/Example:
Let's assume XYZ Company has received an order for 5,000 widgets for a total sales price of $5,000 and wants to determine the gross profit that will be generated by completing the order. First, the variable costs per widget must be determined.
Let's assume the following:
Annual Widgets Produced: 100,000 Raw Materials Costs: $10,000 Direct Labor Costs: $50,000
From this information, we can conclude that each widget costs 10 cents ($10,000 / 100,000 widgets) in raw materials and 50 cents ($50,000 / 100,000 widgets) in direct labor costs. Using the formula above, we can calculate that XYZ Company's total variable cost on the order is:
5,000 x ($0.10 + $0.50) = $3,000
Therefore, the company can reasonably expect to earn a $2,000 gross profit ($5,000 - $3,000) from the order.
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