Agriculture Reference
In-Depth Information
Commissions
—
variable
. BF&G pays a commission to its salespeople as part of their
compensation. Since commissions aren't paid until a sale is made, this represents a
variable cost.
Depreciation
—
fi x e d
. These costs are not a function of sales. Even with depreciation sched-
ules that do not have the same depreciation charge each year, this amount is not tied to
sales.
Maintenance and repair
—
semi-variable, half fi xed, half variable
. Since equipment is on a
scheduled maintenance program regardless of use, the manager has split this cost equally
between fi xed and variable. The fi xed portion captures the regularly scheduled mainte-
nance, and the variable portion captures those repair costs that are related to volume, or
use of the facility and equipment.
Utilities
—
semi-variable, two-thirds fi xed, one-third variable
. Since extra utility costs in the
fall are caused by higher grain sales, the manager felt some of this expense should be
classifi ed as variable.
Insurance
—
fi x e d
. This cost is not dependent upon sales.
Offi ce supplies/expense
—
semi-variable, half fi xed, half variable
. Since more sales result in
higher supply costs, some of these costs are variable. Yet, some offi ce expenses are
borne by the fi rm regardless of sales. Hence, this cost is split between variable and
fi xed.
Advertising/promotion
—
fi x e d
. These are expenses intended to create sales, they are not
caused by sales. Only promotional programs like trading stamps, incentive gifts, and
double coupons would be a variable cost.
Gas and oil
—
semi-variable, half fi xed, half variable
. Since more sales result in higher gas
and oil expenses, part of this cost is variable. But, some gas and oil expenses are borne
by the fi rm regardless of sales.
Delivery and freight
—
variable
. Here, there is no expense unless there is a sale.
Rent
—
fi x e d
. BF&G makes a fl at monthly payment to the owners for rent. Thus, this expense
is not related to sales.
Taxes, licenses, fees
—
fi x e d
. These are typically a fl at fee and not related to sales.
Miscellaneous
—
variable
. The manager of BF&G estimated that the majority of these costs
did, in fact, vary with sales. This expense category represents the aggregation of several
small expenses that do not need to be listed separately on the income statement.
Payroll tax
—
fi x e d
. This cost is tied primarily to salaries and benefi ts and is not a function of
sales.
Bad debt
—
variable
. This expense tends to increase as sales increase. Firms often develop
guidelines for bad debt costs. These benchmarks tend to be expressed as a percent of
sales.
Interest
—
fi x e d
. This expense varies with the amount of money borrowed, not sales volume.
Interest on long-term loans is clearly a fi xed cost. The status of interest on short-term,
in-season loans is less clear. However, borrowing to fi nance inventory is not caused by
the sale. It is to enable an anticipated sale. Only in circumstances where borrowing is
caused by a sale would this part of total interest be classifi ed as variable.
Step 2: summarize fi xed and variable costs
The next step in the procedure to calculate breakeven is to summarize fi xed and variable
costs. Total dollar fi xed costs are summed fi rst. Then variable costs as a percent of sales
are added together. Variable costs may be tracked in dollars/unit, i.e., dollars per ton or
