WIRC Bulletin - January 2019

Separation of Cost Elements into Variable & Fixed

Separation of Cost Elements into Variable & Fixed

CMA Rajesh Kapadia

Management is often required to separate Cost Elements into Variable & Fixed for Contribution Analysis & Other Management Uses.

Main features of Cost Elements either to be considered as Variable Cost Elements or Fixed Cost Elements are as mentioned below :

  • Variable Cost :

It remains same per Unit of Production irrespective of Volume of Production or Capacity Utilisation

  • Fixed Cost :

It totality it remains same for a given period irrespective of Volume of Production or Capacity Utilisation.

However, Cost per Unit of Production decreases with increase in Production Volume and increases with decrease in Production Volume.

Cost Elements as mentioned in Annnexure 1 can be separated into Variable & Fixed as mentioned below :

  • Raw Material Cost

It has got linear relationship with Production Volume.

Hence it should be treated as Variable Cost.

  • Electricity Purchased from Out Side.

Units consumed has relationship with Production Volume though not linear.

Kwh  Per MT of Production depends upon Capacity Utilisation.

With respect to Value part, Fixed Demand Charges will be Fixed in Nature but  it will be of very negligible value in relation to Total Bill Value.

So , for all practical convenience, Electricity Purhased from Out Side should be treated as Variable Cost.

  • Electricity from DG Set

Units consumed has relationship with Production Volume though not linear.

 

Moreover, as Diesel is a major Cost Element, its Per Kwh Cost should be treated as Variable Cost though it has other Fixed Elements like Direct Employee Cost, Consumable Store, Repaires,Insurance & Depreciation.

  • Steam

Units consumed has got linear relationship with Production Volume.

Moreover, as Gas/Coal is a major Cost Element  ( may be around 80 % to 85 % of total Steam Cost), Steam Cost should be treated as Variable Cost.

  • Cooling Water

Units consumed has got linear relationship with Production Volume.

Moreover, as Electricity is a Major Cost Component ( may be more than 75 % to 80 % of total Cooling Water Cost), it should be treated as Variable Cost.

  • Compressed Air

Units consumed has got linear relationship with Production Volume.

Moreover, as Electricity is a Major Cost Component ( may be more than 75 % to 80 % of total Operating Cost), it should be treated as Variable Cost.

  • Natural Gas for Process

It has got linear relationship with Production Volume.

Hence it should be treated as Variable Cost.

  • Job Work Charges

It has got linear relationship with Production Volume.

Hence it should be treated as Variable Cost.

  • Packing Material Consumed

It has got linear relationship with Quantity of Product Packed.

Hence it should be treated as Variable Cost.

  • Consumable Stores

Its incurrence depends upon aging of Plant & Machinery.

As It has no linear relationship with Production Volume, it is always advisable to treat it as Fixed Cost although it is neither Variable nor Fixed in nature.

  • Repaires

It is required to keep Plant & Machinery in good condition.

As It has no linear relationship with Production Volume, it is always advisable to treat it as Fixed Cost although it is neither Variable nor Fixed in nature.

12 ) Direct Employee Cost

As it is period cost, it should be treated as Fixed Cost.

13) Insurance

As it is period cost, it should be treated as Fixed Cost.

14) Depreciation

As it is period cost, it should be treated as Fixed Cost.

  • Overheads

As It has no linear relationship with Production Volume, it is always advisable to treat it as Fixed Cost.

ANNEXURE 1

SR NO COST ELEMENTS VARIABLE OR FIXED
1 RAW MATERIALS VARIABLE
2 ELECTRICITY – OUT SIDE PURCHASES VARIABLE
3 ELECTRICITY FROM DG SET VARIABLE
4 STEAM VARIABLE
5 COOLING WATER VARIABLE
6 COMPRESSED AIR VARIABLE
7 NATURAL GAS FOR PROCESS VARIABLE
8 JOB WORK CHARGES VARIABLE
9 PACKING MATERIAL CONSUMED VARIABLE
10 CONSUMABLE STORES FIXED
11 REPAIRES FIXED
12 DIRECT EMPLOYEE COST FIXED
13 INSURANCE FIXED
14 DEPRECIATION FIXED
15 OVERHEADS FIXED

 

 

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