CALCULATION OF COMPANY COSTS THROUGH THE DIRECT-COSTING CALCULATION METHOD

Transcription

1 Florin-Constantin DIMA Constantin Brâncoveanu University o Piteşti Piteşti, Romania lorin.dima@univcb.ro LCULATION OF COMPANY COSTS THROUGH THE DIRECT-COSTING LCULATION METHOD Case study Keywords Production cost Direct-costing method Breakeven point Coverage actor Dynamic actor o saety JEL Classiication M41 Abstract The cost o production has as its starting point the purchase cost o raw materials and consumables, as well as their processing cost and the calculation o the production cost involves complex aspects. This article is based on the two major concepts o costs calculation, namely the concept o ull costs and the concept o partial costs, and it analyses the direct-costing calculation method. Necessity o the Development o calculation methods to ensure rapid determination o the cost o production, and the establishment o indicators broad spectrum o inormation necessary or making decisions to streamline a business activity conducted by directcosting method. Direct-costing method appeared in the U.S. or the irst time in 1934 (applied by Jonathan Harris and G. arter Harrison). Subsequently, this method was applied to European countries (England, France, Germany etc.). We stopped on this method because it is considered a modern method o costing. Thereore, we analyzed both advantages and limitations o the method in question. 15

2 1. INTRODUCTION: The essence o the direct-costing method consists in separating the production costs in relation to their character towards the variation o the physical volume o production into variable costs and ixed costs. The method takes into consideration, in the calculation o the unit cost, only the variable costs, while the ixed costs are deducted entirely rom the gross result o the company. Variable expenses are identiied and collected directly on cost carriers, considering that only they depend on their production, increasing / decreasing in relation to the increase / decrease in the production volume. Fixed (structure) expenses regard the company s overall capacity to produce, pursuing it globally or in relation to a limited number o places o expenses or cost centres. As a result they are not included in the cost o production but they are deducted directly rom the gross result. 2. LITERATURE While delimiting the cost o production, the cost calculation theory has adopted two major concepts: the concept o complete or ull costs and the concept o partial or proportionate costs. The ull costs are obtained by incorporating all operating expenses. There are two types o costs: - traditional ull costs or consumed costs when the expenses o inancial accounting are integrated as such without restatement; - ull economic costs or consumed costs when the expenses are subject to restatement in order to achieve a better economic expression o the costs. In the accounting practice, as well as in theory, there is oten a distinction between the accounting cost and the economic cost [1]. The ull cost concept requires that the unit cost o the product covers the total costs o obtaining it, that o the direct and indirect ones [2]. Direct costs are deined as those that are directly attributable to the dierent products that determined them rom the very moment o perorming them, and indirect costs are deined as those that cannot be identiied and assigned directly to each product, they regard the whole production o a section [3]. Partial costs all into two categories [4]: - variables costs include only the costs that vary depending on the workload o the company without the necessity o having proportionality between the variation o costs and that o the volume o the products obtained. In this case, the structure costs are excluded rom the calculation, costs which are considered ixed or the period considered; - direct costs: they include expenses that can be directly identiied on the cost carrier (usually operating or variable costs) and expenses which, even i they identiy at the level o an analysis centre, they reer, unambiguously, to the respective cost carrier (variable and ixed costs). The concept o partial costs underlies the direct costing method, also known as the variable costs method, according to which the cost o production takes into account only those costs that vary together with the output. This concept is based on the classiication o costs according to their behaviour criterion, a criterion that reers to how costs react to the changes in the volume o production or o the entity s activity [5]. According to this criterion, the costs are divided into variable costs and ixed costs. Variable costs are those which vary in proportion to the change o the production or activity volume [6]. They include, typically, the direct materials, the direct manual labour and the variable part o the production costs. Fixed costs are those whose absolute value remains relatively unchanged or changes in case o increase or decrease o the output, but in insigniicant proportions. This group includes: depreciation o ixed assets, rents paid or them, salaries o the personnel rom the management, technical, economic or other specialisation, administrative and servicing departments, paid in directing, the social contributions payable, the consumption o materials or the maintenance and cleaning o the departments etc. [7]. 3. RESEARCH METHODOLOGY This article starts rom the undamental dierences that exist in the production cost structure between the two concepts: the concept o complete or ull costs and the concept o partial or proportionate costs. From the range o 16

3 methods o calculation the partial or proportionate costs the direct-costing method is analysed. We started rom the aim o the directcosting method and the ollowing indicators speciic to the method are analysed: - the breakeven point, both in the case o the homogeneous production and in that o the heterogeneous production; - the coverage actor; - the dynamic actor o saety; - saety margin 4. OBJECTIVE OF THE DIRECT- COSTING METHOD Given the delineation o the production costs between variable and ixed ones, the ormula or calculating the unit cost speciic to the direct-costing method is: Unit cost (c ) u Total variablecosts ( v) Output produced(q ) The objective o the direct-costing method, however, is not just to determine the unit cost but also to analyse the overall proitability or the whole enterprise. The gross contribution (Cb) or the proit is thus calculated or each product, also called the gross margin or the margin on the variable costs. This indicator is an analysis tool because it shows how much the variable expenses were covered by the sale price in each product made, so what the enterprise gains by manuacturing and selling one product (the actual return on the operating activity): Cb u = pv u c u Cb u unit gross contribution or proit pv u unit selling price With the help o the unit gross proit contribution we manage to determine the gross result (Rb) o the company. I the products A, B, C,..., are manuactured, the unit gross contribution or each product is multiplied with the quantity sold (Qv) and the ixed costs are subtracted rom the amount obtained ( ), leading to the gross result: Rb = (Cb u/a Q v/a + Cb u/b Q v/b + Cb u/c Q v/c +...) - total gross proit contribution(cb) Making the connection with the turnover (), the total gross proit contribution is the dierence between the turnover and the total variable costs: Cb = - v, and the gross result, in its turn, the dierence between the total gross proit contribution and the total ixed costs: Rb = Cb - The result is not calculated on each object o calculation, but or the entire activity, a act required by the nature o the ixed costs to be charged on the total gross proit contribution and not on each product. In terms o proitability, it aims to maximise the contribution to the proit that bears the structure costs. 5. LCULATION OF THE INDITORS SPECIFIC TO THE DIRECT-COSTING METHOD The management o the modern enterprise is able to take rational decisions that will produce the best results only i it takes into account the act that the ixed and variable costs can be ound in constant contact with the volume o activity, respectively with the degree o use o the capacity and the sales price o the production. This correlation is ound in the literature and in the economic practice as pricecost-volume analysis and it is expressed by means o some indicators such as: breakeven point, coverage actor, dynamic saety coeicient and saety margin THE BREAKEVEN POINT The breakeven point (the equilibrium point) (q e) is the point at which the company begins to make a proit, respectively the point where the total costs equal the total revenue. The calculation o the breakeven point diers 17

4 depending on the type o production achieved: homogeneous or heterogeneous. Determining the breakeven point or the homogeneous production: Based on the turnover calculation relationship, there is the condition that the proit is null (at this level the breakeven point is reached): Q v pv u = Q v c u + + R pv u unit selling price c u unit variable cost Q v the amount o products sold total ixed costs R result (proit or loss) I marked with q e the physical quantity o products that the company must produce and sell or the proceeds to cover the variable and ixed costs (the physical breakeven point) and i you take into account the act that at the breakeven point the result is null (R = 0), the calculation o the quantitative breakeven point shall be done in the ollowing way: q e pv u = q e c u (pv u c u) q e = Cb u => qe Cbu q e physical production at breakeven point level Furthermore, a value-related breakeven point ( e) can be expressed, which expresses the turnover in the equilibrium point (the critical turnover) suicient to cover the costs: e = q e pv u In order to illustrate the calculation method we shall consider the case o S.C. Ala S.R.L. which provides a homogeneous production o 10,000 units o product A under the ollowing conditions: unit selling price = 200 lei, unit variable expense = 120 lei, total ixed costs = 280,000 lei. q e Cb u 280,000 lei 3,500 pcs. 200 lei/pcs. 120 lei/pcs. It results that i the unit will sell 3,500 pieces o product A, it will cover the expenses and the result will be null (that is to say it neither gets proit, nor loss). e = q e pv u = 3,500 pcs. x 120 lei/pcs. = 420,000 lei Determining the breakeven point or the heterogeneous production The calculation method o the breakeven point is similar, except that in the case o the heterogeneous production (when we get two or more products), there will be used average dimensions (the average gross proit contribution, the average selling price, and so on). We determine the average unit gross proit contribution by relating the total gross proit contribution to the sum o the quantities sold rom each type o product: Cbu i Qv Cb i u Qv i Q vi quantity sold o product i average unit gross proit contribution The physical breakeven point is determined by reporting the value o the ixed costs to the average gross unit contribution or proit: Cbu qe Cbu It should be noted that determining and analysing the breakeven point can give useul inormation as long as the combination o the assumptions underlying it does not change. In those businesses in which structure data change requently, the breakeven point calculation is relevant when it is perormed on very short periods. In order to illustrate the calculation method we start rom the case o S.C. Beta S.R.L. which carries out a heterogeneous production, as ollows: 18

5 Table 1. Heterogeneous production indicators No. Explanations A B C 1. Quantity sold (pcs) Unit selling price (lei/pcs.) Variable expense per unit (lei/pcs.) Total ixed expenses (lei) 40,000 In order to determine the breakeven point we start rom the calculation o the unit gross proit contribution (Cb u) or each product, as dierence between the unit selling price and the unit cost. The calculations were carried out in the ollowing table. Table 2. Determining the unit gross proit contribution No. Explanations A B C 1. Quantity sold (pcs.) Unit selling price (lei/pcs.) Variable expense per unit (lei/ pcs.) Total ixed expenses (lei) 40, Unit gross proit contribution (lei/pcs.) (2-3) We determine the average unit gross proit contribution: Cb u (180100) ( ) (300300) ,33 lei/pcs. We determine the physical breakeven point: 40,000 lei q e 152pcs. 263,33lei/pcs. In order to calculate the physical breakeven point or each type o product, we calculate the speciic weight o each product in the total quantity o goods sold: - or product A: g A = 100 pcs. / 600 pcs. = 16% - or product B: g B = 200 pcs. / 600 pcs. = 34% - or product C: g C = 300 pcs. /600 pcs. = 50% - total 350 pcs - 100% The breakeven point or each type o product is determined by multiplying the total breakeven point with the weight speciic to each product: - or product A: 152 pcs. 16% = 24 pcs. - or product B: 152 pcs. 34% = 52 pcs. - or product C: 152 pcs. 50% = 76 pcs. total 152 pcs. 19

6 5.2. THE COVERAGE FACTOR The coverage actor (Fa) expresses the percentage o the contribution o each product to covering the ixed costs and to obtaining the beneit. The indicator directs the company s decision towards the products with the highest coverage actor. It is calculated as a percentage in two ways: - either by relating the proit contribution to the total volume o the sales at the selling price (turnover) and then multiplying by 100: Fa Cb or by relating the ixed costs to the volume o the sales at the selling price at the level o the equilibrium point (critical turnover) and multiplying by 100: Fa e 100 In the case o S.C. Beta S.R.L. the indicator is presented as ollows: Cb 158,000 Fa 100 = 100 =79% 200, THE DYNAMIC COEFFICIENT OF SAFETY The dynamic coeicient o saety (Ks) shows how much sales may decrease beore the enterprise reaches the equilibrium point, any decrease above this coeicient causing the entrance to the ield o losses. The decisions o decreasing the sales must be taken within this coeicient. We calculate the percentage as ollows: - Ks e 100 In the case o S.C. Ala S.R.L. the indicator is presented as ollows: - Ks e 100= 2,000,00-420, =79% 2,000, SAFETY MARGIN The saety margin (Is) is the expression in absolute igures o the dynamic coeicient o saety. It is calculated as the dierence between the total turnover and the turnover in the equilibrium point: Is = - e In the case o S.C. Ala S.R.l. the indicator is presented as ollows: Is = 2,000, ,000 = 1,580,000 lei 5.5. CONCLUSIONS Treating the ixed costs as a block within the direct-costing method represents a simpliication o the calculation, which only allows the development o certain decisions on short periods by the assumption o certain given capacities and production processes. A calculation o the coverage contributions that allows a gradual coverage o the ixed costs (or long periods all the ixed costs must be regarded as changeable) comes to cover this gap and makes the method suitable or decisions that consider long periods o time. In addition to the presentation o this research a more complex paper that can be done based on the price-costvolume analysis. This approach takes into account the optimisation o the result o the economic activity, optimum obtained by recording the highest proit. This is achieved by determining the inluences that the change o those actors underlying its establishment has on the proit: the selling price, the production and sale volume, the variable costs, the ixed costs, the production structure. Bibliography [1] Briciu, S. et al (2010), Contabilitatea și controlul de gestiune: instrumente pentru evaluarea perormanței entității, Ed. Aeternitas, Alba Iulia, p. 77 [2] Briciu S., Contabilitatea managerială. Aspecte teoretice şi practice, Ed. Economică, Bucureşti, 2006 [3] Călin, O., Cârstea Gh. (2002), Contabilitatea de gestiune și calculația costurilor, Ed. Genicod, București, p. 36 [4] Călin O. ş. a., Contabilitatea de gestiune şi calculaţia costurilor, Ed. Tribuna Economică, Bucureşti,

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