Agriculture Reference
In-Depth Information
his/her time in this area. Thus, in deciding upon a proper cost allocation system, it is often
important to ask many questions and make sure the scheme selected is the fairest allocation
method.
Length of time period
The length of the time period under consideration has a great deal to do with whether a cost
is classifi ed as fi xed or variable. In the very long run, all costs become variable with
sales volume. Even depreciation, often considered the classic fi xed cost, can vary with the
volume of business if the time period is suffi ciently long that new facilities can be built and
equipment purchased. For example, over a fi ve-year period, if the business grows, an entire
new set of facilities may be constructed as a direct result of the increased volume of busi-
ness. But in the very short run, say one day, all but the most direct costs associated with
the cost of the product and the actual cost of the sale are fi xed and cannot be changed within
that period.
Therefore, it is important to defi ne the time period that is under consideration. The time
period selected depends entirely on the problems that are of concern and the decisions to be
made. In attempting to utilize volume-cost analysis, time periods considered are usually
reasonably short, such as a season or a quarter or, most commonly, a year.
In practice, the fi ne points of separating fi xed and variable costs are not that critical to
making rough approximations of the volume-cost relationships. The analysis, of course, can
be no better than the information used in making the analysis. But experience shows that so
long as reasonable care is taken in classifying costs as fi xed and variable, and a realistic time
period is assumed, close approximations of fi xed and variable costs may be made without
regard to semi-variable costs allocations, non-linear variable costs, or lumpiness. Volume-
cost analysis can then proceed, providing highly useful insights into important management
questions. Of course, if major violations of the simple assumptions are known to exist, cau-
tion should be used, and one should attempt to take these special situations into account in
the analysis.
Volume-cost analysis procedure
cost relationships. There are four distinct steps in determining the breakeven point from the
fi rm's income statement:
Step 1: classify fi xed and variable costs
The actual classifi cation of expense items from a fi rm's income statement depends on the
makeup of each. Thus, it is necessary to be familiar with the operation and its accounting
system in order to be accurate with the classifi cations. For example, rent for one fi rm may be
strictly a fi xed monthly amount, while another fi rm may have a rental contract that ties rent
to the level of sales, making it a variable cost.
Take a look at BF&G (
Table 12.1
)
and classify its fi xed and variable costs for the year.
BF&G is an actual agribusiness fi rm operating in the Midwest; the determination of its fi xed
and variable costs is based on the actual situation as interpreted by its manager. Note that
in most cases fi xed costs are tracked in total dollars, and variable costs are calculated as a
percentage of sales.
