CHAPTER II LITE RATURE STUDY

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1 CHAPTER II LITE RATURE STUDY 2.1. Cost Terminology Based on Charles T.Horngren (2009: 53), cost is a resource sacrificed or forgone to achieve a specific objective. A cost is usually measured as the monetary amount that must be paid to acquire goods or services. Based on Charles T.Horngren theory, the writer will use the cost behavior patterns because it is suitable with this research limitation Cost-Behavior Patterns Based on Charles T.Horngren (2009: 56), recording the costs of resources acquired or used allows manager to see how costs behave. It is refer to how costs behavior whether it is changes or not within the given period or change in activity or volume. The costs that involved in cost-behavior patterns are variable cost and fixed cost Variable Cost Based on Charles T.Horngren (2009: 56), a variable cost changes in total in proportion to changes in the related level of total activity or volume.. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc Fixed Cost Based on Charles T.Horngren (2009: 56), a fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc. 7

2 2.2. Unit Cost The unit cost can be calculated by simply divided the total manufacturing cost with the number of unit manufactured. The unit cost is how much cost occurred to produce each unit of a product. Based on Charles T.Horngren (2009: 61), Unit cost are found in all areas of the value chain-for example, unit cost of product design, of sales visits, and of customer-service calls. By summing unit costs throughtout the value chain, managers calculate the unit cost of the different products or services they deliver and determine the profitability of each product or service. Below is the formula to calculate the unit cost. Unit cost = 2.3. Contribution Margin According to Charles T.Horngren (2009: 68) The difference between total revenues and total variable costs is called contribution margin. Contribution margin indicates why operating income changes as the number of units sold changes. Contribution margin per unit is a useful tool for calculating contribution margin and operating income. Contribution margin per unit is the difference between selling price and variable costs per unit. Below is the formula. The Total Contribution Margin (TCM) is Total Revenue (TR, or Sales) minus Total Variable Cost (TVC): TCM = TR TVC The Unit Contribution Margin (C) is Unit Revenue (Price, P) minus Unit Variable Cost (V): C = P V 8

3 The Contribution Margin Ratio is the percentage of Contribution over Total Revenue, which can be calculated from the unit contribution over unit price or total contribution over Total Revenue: Unit contribution margin ratio = Total contribution margin ratio = 2.4. Breakeven Point The Break Even Point is a point at which what we get equal what we lose. The point where sales or revenues equal expenses. Or also the point where total costs equal total revenues. There is no profit made or loss incurred at the break-even point. Breakeven point objective is to know how much product needs to be sold to get a zero operating profit. The formula of breakeven point is fixed cost divided by the contribution margin of the product. Below is the formula. Breakeven point = Breakeven Point Analysis for Multiple Products To satisfy the needs of different customers, many manufacturers sell a variety of products, which often have different variable and fixed costs and different selling prices. To calculate the breakeven point for each product, its unit contribution margin must be 9

4 weighted by the sales mix. The sales mix is the proportion of each product s unit sales relative to the company s total unit sales. (Needles, 2007: 980) The breakeven point for multiple products can be computed in three steps: Step 1: Compute the weighted average contribution margin. To do so, multiply the contribution margin for each product by its percentage of the sales mix. Step 2: Calculate the weighted average breakeven point. Divide total fixed costs by the weighted average contribution margin. Step 3: Calculate the breakeven point for each product. Multiply the weighted average breakeven point by each product s percentage of the sales mix. (2007: 981) Below is the breakeven point profit-volume graph. Figure 2.1, Breakeven point profit-volume graph 2.5. Cost Volume Profit (CVP) CVP is a further analysis after the breakeven point has been calculated. The purpose of CVP is to know how much unit needs to be sold with a target profit. Based on Charles T.Horngren (2009:87), Cost-volume-profit (CVP) analysis examines the behavior of total revenues, total costs, and operating income as changes occur in units sold, the selling price, the variable cost per unit, or the fixed costs of a product. Below is the formula of CVP. 10

5 (NOPAT) 11

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