‘+ Seasonal phenomena and allocation). + Spare capacity, €.9. to take into account any unexpected ‘ditional demands, The costs of safety capacity are often lower than the costs from a disappointed customer would be. Because ofthis, safety capacity is often maintained incase of maintenance or cancellation of, for example, ® coach, plane, bungalow, In none of the above cases, Is there any question of erroneous decisions on the managers side, As such, we tak about rational overcapacity, Irrational overcapacity, on the other hand, occurs as 2 result of faulty business operations. E.g. Building an oversized hotel In which 50% remains unoccupied, ‘The following diagram further clarifies the different types of capacity esl Norma atonal ‘Moomum eval) capecty sceipeon capscty caoeaty x x x ortcpecty [Coats normal accupation + costs rational overcapacity costs rational capacity, * standard cost price + costs irational overcapacity ‘avaliable capacity 7 ‘An additional distinction can be made between: ‘+ Simuttancous capacity 49, 200 hotel rooms +15 tennis courts + Sequential capacity +365 nights Es. = 200 days oF 13 nyday + Maximum capacity = 200 hotel rooms x 365 nights = 73.000 nights/vear + 15 tennis courts x 200 days x 13 h/day = 39,000 court hours/year ‘The maximum capacity corresponds to the availabe capacity discussed ‘above or, should there be no iratonal overcapacity, withthe rational capacity. aking into account the above, the standard cost price can be determined ‘STANDARD COST PRICE ‘Total fied standard cost per period Normal occupation ‘Total variable standard costs per period ‘Expected procuction Fixed costs are divided by the normal occupation, the variable costs are divided over the expected production. ‘Should the actual occupation (AO) «the normal occupation (NO), there are 3 possibilties. AO > NO = receive too much = over-occupation prof AO < NO = receive too litle = under-occupation loss ‘AO = NO = occupation result il[The better the capacity ie used, the Tower the fixed cost per unt wil BE Should a certain sales volume be exceeded, the total fixed costs wil Increase. For example, if restaurant has 20 tables and often has to refuse customers due to lack of space, the decision can be made to carry out a renovation, which may cause the number of tables to rise to 30. The xed costs will increase due to the renovation and the purchase of tables, chairs and accessories 1. An enterprise produces 2.000 units of product In @ given period. The ‘otal costs amount to €18,000. Ina subsequent period, the production will be extended to 2.200 unts. The total costs increase to €18.800, The increase In production can take place within the existing capacity. Price changes do not affect the level of costs. The variable costs are proportionally variable Asked: 2) Caleulate the variable costs per unit of product. ') Determine the total fxed costs per period of production. ©) Should the sales price be €10 and the normal occupation Is 2,000 tunis, then how do you describe the profit created from a production ‘oF 2,000 units? 2. Accompany manufactures one type of product. For each production period, the following numbers apply =Total fixed costs: €80,000 = Proportionaly varlable costs: €#/unt = Per 1.000 units of product, 1 employee is needed = Number of employees per production manager: 6 ~ Per 600 units of product, 1 machine s needed = Per production period, 1 employee costs €15.000, production manager costs €24.000 + 1 machine costs €3.000 per production period 55 ~The company has a normal production of 5.000 units per period, and ‘2 capacty of 7.000 units. The expected production for the coming | riod is 6.200 unis, Asked: 2) Determine the cost price per uni for the coming period, ») Is there an over-occupation profit or an under-occupation loss and if 50: how much? ©) Determine the cost price should the expected production be 5.900 ‘and 7.200 units.ss 10.4 Cost structures “The relationship between the total fled and the variable casts is called the cost structure. The cost structure of a company Is largely the financial risk that 2 company runs ifthe sales should decrease in a certain period. With Increasing sales, the cost structure determines to what extent a company ‘an benefit from ths. I fed costs become @ larger part ofthe total costs, then the risk increases, asthe fixed costs do not fall the sales do not meet the expectations. The following example ilustrates the impact that the ratio between fixed and variable costs may have on the annual result of company. ‘iver: ‘Two bungalow parks A and & have a similar product to offer, They each hhave 30 bungolows and in the past year they bath rented out 1.000 bungalows on 2 weekiy basis. The price per bungalow per week amounted 0 12.000. The only diference between these parks can be found in the cost structure. Bungalow park A has relatively more xed costs thon B, The fixed costs for Bungalow park A are €6.000.000, while the variable costs per bungalow per week are €2,000. For Bungalow park & these amounts ‘are €3.000.000 and €5,000 respectively For the coming year they expect to be able to sell 800 bungalow weeks, Asked 2) Calculate the annual result forthe past year for bungalow park A and 6. ') Caleulate the expected annual result for the coming year. ©) Explain what causes the elfference that appears In question b. 2 ‘Solution: 2) Bungalow park A: Total revenue 1.000.x€12.000 = Total fixed costs . €12.000.000 = 6.000.000 “otal variable costs 1.000 x€2.000 = = €2.000.000 4.000.000 Total year result Bungalow park 8: Total revenue 1.000 x €12.000 12,000.00 = €3.000,000 Total xed costs _ Total variable costs 1.000%€5.000 = —-€5.000.000 “Total year resut ‘4.000.000 ) Bungalow park A: ‘Total revenue 800 €12.000 = —_€9,600.000 “Total fixed costs = -€6,000.000 Total variable costs 800x€2.000 © = —-€1.600.000 “Total year result 2.000.000 Bungalow park B: Total revenue 800x€12.000 = —_€9,600.000 Total fixed costs = -€3.000.000 Total variable costs 800%¢€5.000 = ~~ 4.000.000 Total year result 2.600.000oo ee 11.2 Specialization methods ‘When specializing, one can either proceed in avery broad, general way, or fone can allocate costs to products in the smallest detail. The choice between the different methods depends on the situation ofthe company, More on this later, 11.2.1 Partition calculation This is the easiest of the methods. Using this method, the total costs per Period are divided by the total number of products produced. Naturaly, this ‘method can only be applied in homogeneous production (= 1 type of, product). Eg. Atravel agency has an annual tumover of €624.000, with the following indirect costs: Rent building 15.000 ‘office maintenance ——_—€3.500 Pubiicey 62.950 lectricty 37s lortice costs 6.500 31125 How many indirect costs are calculated when a journey witha (direct) cost rice of €4.000 is sold? ES + SES = 00098 = en0s €4.000 x 0,05 = €200 11.2.2 Surcharge calculation For this method, the Indirect costs are allocated according to the extent to Which they cause direct costs. This method presupposes thatthe amount of indirect costs caused by a produc, will be proportional to the extent to Wich it causes direct costs, ‘The following can be used as the basis fo the cost basis: ~ tatal direct costs direct costs raw materials + direct costs labour + quantity of raw material or labour, etc. Depending on whether one or more allocation Keys are use, we wil refer to elther the primitive or the refined surcharge method. In the surcharge calculation method, a product's or service's cost price is ‘alculated by increasing the direct costs with a surcharge percentage for the indirect cost.e Se 11,2.2.1 Primitive method ‘The indirect costs are calculated by the means of only one allocation key. Preference wil then be given to a determination of quantity over price, This 's done in order to avoid price fluctuations inthe allocation key. Specie ‘attention should be paid to the use of ratios in previous years: might there hhave been any over- or under-cccupation? If we go back to the same travel agency example (see paragraph 11.2.1 Partition calculation) with @ €625.000 revenue, The total Indirect costs are Stil set at €31.125, while the direct costs are €250.000. ‘An 8-day winter sports trip comes withthe following direct costs: = transportation per passenger 100 ~ accommodation per passenger 102.5 ~ ski pass per passenger 97,5 + ski rental per passenger «50 Toto! airect costs e400 Surcharge Incvect costs * <0 cost price caso "Calculation of surcharge indirect costs: uns SSR 100% = 12.45% 400 x 12,45% = €49,8 = €50 oe 1.2.2.2 Refined surcharge method In this method, the indirect costs are split categorically. As such, we end up With e.g indirect costs for raw materials, indirect costs for labour, indirect ‘costs for machinery. For each ofthese costs, we vill look fora separate ‘allocation key, e.g. the indirect costs for raw materials wil be divided ‘2ccording tothe total use of raw materials. Going back to the same exercise from the primitive method. Indirect costs and direct costs are divided into: DIRECT COSTS 10.000 77.500 162.500 250.000 oftee SS x100% = 61.25% Transportation 2% «10035 = 12.9% ~ 13% Accommocston — £2 «100% = 9.23% = 925% Foran 8 dy-tp Transporation per passenger c100 Inciect costs aa (10013 6) ‘Accommodston per passenger €162,5 Indirect costs as (182,5.5,25 %) St pass ors Sk rental so Indirect costs oe cent 975%61,25%) ae ee Cost price (€512,24 = €512,5oa EE 11.2.3 Cost centre method Using this method, product's or service's cost price is determined by rectly attributing the direct costs to the final products or services and by ‘Giving the indirect costs aver the cost centres, ‘A cost centre isa business unit where one performance is provided, e.g. the ‘reception, the restaurant, the ber, ‘There are three types of cost centres: + Auxliary cost centres: ‘These are not tangible departments, but cost groups that are made forthe purpose of costing Eg, administration, housing + Independent cost centres: ‘These are rel, existing departments or sub-departments that don't Participate in production directly, but do offer certaln service to the production Eg. Accounting, service for: personnel, maintenance & repairs, + Main cost centres: ‘These are the departments or sub-departments where the actual production process takes place E.g, Manufacturing hall, printer, kitchen, rooms, For this method, the specialization takes place step by step. 65 Se FIRST STEP: Indirect costs are charged tothe cost centres: .g, Maintenance products to housing * manufacturing hal E.g, Purchase paper to * administration * accounting ‘SECOND STEP: ‘The total costs forthe auxllary cost centres (and subsequently forthe independent cost centres) are divided among the other cost centres Eg. Total housing administration im? accounting 1m? printer m2 manufacturing hall ‘THIRD STEP: ‘The costs forthe main cost centres are divided among the cost uns, these Products and now carry all cost, facturing hall 40% product A 60 % product & ; a 8 ‘sep 0 | step 0 step | step a ‘sept | step T ‘step T step 1 step1 | step Total step2 | step2 Total step 2 Totar steps | stepa“This method offers great accuracy, especially when a large number of cost ‘centres are formed ‘This method is also very sultable forthe monitoring of business efficiency, 2s It offers a clear overview of where the costs are made. “The big disadvantage to this method, however, is that many operations are Involved, which also entals high administration costs, ‘That is why one wll sometimes opt for one ofthe simpler methods in a ‘small company. EXERCISES 1. A.company that produces two products, has the fllowing cost estimate: production A production 8 Airect costs for ra direct labour cost Indirect costs for 40.000 units 60,000 units yw materls €480,000 raw materials €180.000 Indirec: labour costs 220.000 other indirect costs 80.000 x 5 Direct labour costs S @ Direct costs Tor aw G e materials Asked: Calculate the cost 2) Apply the primitive surcharge method to the previous exercise, Using as the st 1 2 price for A and 8. surcharge basi: direct cost for raw materials direct labour costs b) Apply the refined surcharge method, using the total costs as the basis forthe other indirect costs. ©) Compare the cost prices as such, 2. Below, you can find the cost partition forthe coastal hotel SEA WIND (all costs are expressed in €1.000) for the year 2018, (Costs (EI.000) HO [RA] A] WW TRO] KE | RE] BA raw materials 25 [162 | 28 | - wages 263 | 146 | 106] 20 = depreciation inventory 0] 5 | 30 | a5 Total direct costs 323 | 366 [298 | 73 wanes Te | 32 | 210] 2 energy 120 - deprecation and interest | 405 26 wzfrofis} 1 oo} + |i] > se} 2| 22} a = other w)2|7 Beifearls [a Tota indirect costs B72 | aa [357 | ai faze] 7 | a7 |S ‘Abbreviations Ho = HOUSING RM = REPAIR AND MAINTENANCE MA = MANAGEMENT AND ADMINISTRATION WW = WAREHOUSE and WINE CELLAR RO = ROOMS kr = KITCHEN RE = RESTAURANT BA =5AR