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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.
2.1.1. 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.
2.1.1.1. 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.
2.1.1.2. 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.
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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
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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 =
2.4.1. 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
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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.
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(NOPAT)