Variable costing is a technique to measure contribution margin that is the sales that is exceeded over variable costs. A firm ensures its profit when the variable costing is high, that is it is sufficient enough that it covers the fixed costs. The key factor to determine the profit percentage of a firm is none other than variable costing.[ad#ad-4]
The production costs and sales volume are the two basic terms that are very much inter-dependent determinants of the percentage of profit. The analysis of the behavior of the costs with respect to the fluctuating volume of sales and its effect on profit is needed to find the breakeven level of a company. The breakeven level is a level at which net total revenue of the sales equals the total costs of the products. In this case, there is a situation where lies a no-profit or no-loss scenario.
The profit is incurred when the sales are beyond the breakeven levels. Normally the production is carried out in precedence to the demand forecasting process, this ultimately decides the total volume of production, the total amount of products that is to be absorbed by the market and in the market. The pricing and the promotions of the product is done later. Hence the costing is made to predict the total production costs and the net profits at the various steps of this process.
The costs of the products that changes constantly and directly with any change in production are assigned to variable costing. This cost demarcates the change between production step and inventory step. It also helps to know the profit from the total sales.
The most important step is the pricing of the product that makes the product ready to sale. The total production cost can be classified into fixed costs, variable costs and semi variable costs. The Fixed costs is always constant and is always unaffected by the changes in the production. But the variable cost is directly proportional with the production of output whereas the semi-variable costing is sometimes fixed and sometimes variable.
Written by: Matt
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Tagged as contribution margin, demand forecasting process, determinants, net profits, precedence, profit percentage, promotions, sales volume, variable cost, variable costing, variable costs + Categorized as Finance