1. Basics of financial management Chapter 12

2. Absorption costing (AC)
Total costs
Total volume
Cost per unit =
Cost per unit can only be calculated at the end of the period and changes in relation to volume change
Actual volume
Cost per unit changes in relation to volume change
Budgeted volume
Cost per unit does not change in relation to volume change
Normal volume

3. Total fixed and variable cost at normal volume
Full cost per unit
Full (standard) cost per unit: Total cost per unit at normal volume
Normal volume:
Average capacity utilization for the next years based on estimated sales
Total fixed and variable cost at normal volume
Normal volume
Full cost per unit =
or, in case of proportional costs

4. Volume variance A > N  favourable variance
A < N  unfavourable variance
A = N  no volume variance

5. Direct costing (DC)
Direct costing allocates only variable costs to products
Variabele costs  Product costs
Fixed costs  Period costs
On the short-term the operating profit only depends on the (controllable) variable costs.
Fixed costs are deducted directly from sales to calculate profit.
Essence

6. Operating profit in direct costing
Sales p x q
Variable costs of sales -/- v x q
Total contribution margin (p – v) x q
Total fixed costs /- F
Operating profit (p – v) x q - F

7. Comparison AC and DC
Production volume > sales volume  profit AC > profit DC
Production volume = sales volume  profit AC = profit DC
Production volume < sales volume  profit AC < profit DC
Cause: treatment of fixed costs
Difference: inventory change x fixed costs per unit

8. Costs and decision making
Different costs for different purposes!
Examples:
Limiting factor approach
Differential calculation

9. Limiting factor approach
Maximizing profit is impossible due to a limiting factor External (market): Maximum sales volume < production capacity Internal: Production capacity < possible sales volume The solution is optimizing capacity allocation to products in order to realize the highest possible contribution margin.

10. Solution limiting factor approach
External limiting factor
First allocate capacity to the product with the highest contribution margin per product unit.
Internal limiting factor
First allocate capacity to the product with the highest contribution margin per limiting factor unit (e.g. machine time)

11. Differential calculation
Calculation of change in costs and revenue in relation to a change in volume.
Differential costs:
Extra costs caused by an increase in volume above the basic volume.
Example:
Special order:
Assessment on the basis of differential costs and differential revenue

12. Economic lifespan
Period during which the average costs per product unit are lowest.
Caused by:
Purchase
Use
Costs include:
Depreciation
Interest
Operating costs

13. Economic lifespan determination
Value/
costs
Operating costs
Depreciation
+ interest
Performance value
Economic
lifespan
Technical lifespan