Introduction

From the manufacturing company that I selected in the previous discussion forum, there are several
variables costs that are incurred. This includes Wages, Direct production materials ie leather, beads,
material lining, sewing threads and adhesive glue. Direct labor is the cost that is incurred while paying
women who bead the products and the leather technicians who are paid for product finishing, Machines
running hours is also another variable cost that is incurred by Maa Beadwork in manufacturing process,
When the workload is small few costs are incurred by the leather skiving machine less cost is also
incurred by the cylinder head, sewing and strap cutter machine. From audited financials of Maa
Beadwork it the following variables costs were recorded.

Direct Lobour costs. These are the costs that can easily be traceable in production of a particular
product or item. For instance the leather artisans working on a piece of leather are paid for doing that
product. Normally we pay them for the number of hours they’ve used to make the item. That cost is
added to the item overall production cost. (Kasneb 2019) Maa Beadwork incurred Ksh. 4,748,900 as
direct labour expense during the last financial year.

Direct Materials. This is the cost of a material that goes into making that particular item. This cost can
easily be traceable in making the product. For instance I do buy beads and leather that will be used to
make leather and non-leather items. Direct materials cost costed maa beadwork ksh. 5,956,600 last year
from the draft audited financials.

Wages/Commissions. As the level of activity/production goes up the cost of wages also changes since
we tend to hire more casuals to do finishing and assembling of some products to meet client’s specific
deadlines. For instance Maa Beadwork hires more casuals during high season and towards December
when production is at its peak to maximize profits and the available market. Wages and commission
recorded a significant drop from 2019 from 1,168,300 to ksh.564,200. This was contributed by the fact
that production was halted and we closed down operations due to Covid-19

Machine running hours. This is another variable cost incurred by Maa Beadwork. This company owns
several machines that are used in production and in finishing of the products; these machines include
Leather Skiving, sewing, cylinder head and grinders. This cost goes up when the level of activity also goes
up. For instance we charge the cost of machine running hours into the product by determining how long
has the machine run and multiply by machine hourly running costs.

Shipping costs. Maa Beadwork ship items to several countries via DHL Worldwide courier. This is the
cheapest and safest courier that we settled on. Normally this cost varies as level of output changes. For
instance we have been busy working on production belts bulk order for Yonder Horse project. Shipping
cost rose significantly by 39.5% as compared to the previous year.

Contribution margin. Contribution margin is defined as the difference between revenue and variable
costs (CM=Revenue-Variable costs) Walther, L. M. & Skousen, C.J. (2009).
 Hypothetical figures
Maa Beadwork incurred a production cost of $ 700 per unit of
items made and spend $ 200 for the cost of shipping for every
item sold, The variable cost is $ 700 for every item. Each belt is
sold at $1500. Additionally Maa Beadwork incurs a fixed cost of
$ 200,000. Below is an illustration of the contribution margin for
500 Units of belts
Cm=
Revenue-
Variable percentag
costs   Total Per Unit e
         
$500x150 $750,000.0 $1,500.0
Revenue 0 0 0 100%
         
Variable $350,000.0
costs $700x500 0 $700.00 40%
         
Contribution $400,000.0
Margin   0 $800.00 60%
         
$200,000.0
Fixed costs   0    
         
$200,000.0
Net Income   0    

To get total revenue, we multiply the total units of belts being produced with the unit cost of a belt
(500x$1500) and to get the per unit (($1500x500)/500)). To calculate Variable cost we multiply units of
belts produced with the variable unit cost per belt (500x$700). The contribution margin= Revenue-
Variable cost ($750,000-$3500,000) Finally to get Net income we will deduct fixed cost form the
contribution margin($400,000-$200,000).

Conclusion.

From the above analysis we see that the variable cost plays a great role in determination of contribution
margin. Fixed cost cannot change as the level of activity changes. When variable costs change definitely
the contribution margin changes. Maa Beadwork produces 500 units of belt making a contribution
margin of $400,000 and if you less the fixed cost of $200,000 hence you will get net profit of $200,000.
So the company will know which number of units to produce to achieve certain net profit.
References

Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost

Accounting. https://library.ku.ac.ke/wp-
content/downloads/2011/08/Bookboon/Accounting/managerial-and-cost-accounting.pdf
Pg 50

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