Value Chain Functions, Costs, and Cost Drivers Eg: Manufacturer of pet foods Value chain function and Example costs Example Cost Drivers Distribution • Wages of shipping personnel Labor hours • Transportation costs including Weight of items delivered depreciation of vehicles and fuel Customer service • Salaries of service personnel Hours spent servicing products • Costs of supplies, travel Number of service calls
Value Chain Functions, Costs, and Cost Drivers How well we identify the most appropriate cost drivers determines how well managers understand cost behavior and how well managers can control costs If the activity includes all aspects of the production and sale of a particular product or service, then the cost driver is the number of units produced and sold, which we assume drives all the resource costs.
Objective : 2 How the changes in Cost- driver levels affect variable and fixed costs
Variable – Costs and Fixed-Costs Behavior Costs Fixed Costs Variable Costs
Variable – Costs and Fixed-Costs Behavior Variable Costs: A cost that changes in direct proportion to changes in the cost-driver level. This means that total variable cost increase when more units are produced and decreases when less units are produced.
Variable – Costs and Fixed-Costs Behavior Fixed Cost: A cost that is not affected by changes in the cost-driver level.These costs will incur even if no units are produced. Eg: Suppose the cost driver is units of goods or services produced. A 10% increase in units produced would result in a 10% increase in variable costs. However the fixed costs would remain unchange.
Variable costs and Fixed Costs Think of variable costs on a per- unit basis The per-unit variable cost remains Unchanged regardless of changes In the cost-driver Think of fixed costs on a total- cost basis Total fixed costs remain unchanged regardless of changes in the cost- driver
Variable costs and Fixed Costs
Variable costs Fixed Costs
Making Managerial Decisions Test Your understanding of the distinction between variable and fixed costs by answering the following questions 1. A producer of premium ice cream uses “ gallons of ice cream produced” as a cost driver for the production activity. One of the main resources this activity uses its dairy ingredients. Is the coat of dairy ingredients a variable or a fixed costs with respect to production volume?
Making Managerial Decisions 1. Another resources used by this activity is supervisory salaries. If supervisory salaries do not change with the level of production of ice cream, is the supervisory salaries cost variable or fixed with respect to production volume?
Planning and controlling of Costs Eg: Boeing’ plant – Receiving parts that production workers install on an airplane Consider the two of the resources used: Equipment and fuel costs.
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