Practical Direct Costing

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Variable Costing > Best Practices > Practical Direct Costing

Practical Direct Costing
Lisena Giordano, Business Consultant, Italy, SIG Leader
It Solves the Problem of Classification of Variable Costs with Non-subjective Speculations. At first sight, a blast furnace to melt metals, which uses gas, electricity or coal, should consider this cost as variable, because it depends on the production. But it is practically not to impute this cost directly in the invoice to the customer, so we use an unorthodox but effective method: In a reclassification of the income we treat this cost as FIXED. 1,000,000100%turnover Variable costs450,00045% Contribution margin550,00055% Fixed costs200,00020% Electricity50,000 5% Operating profit300,00030% The contribution marginthe firm will usein its management ofquotes and ordersis 55% (because variable costs450,00045%, contribution margin550,00055% and 1,000,000100%turnover). So by adding to the value of the variable contribution margin as a percentage of the price we get, we note that the contribution margin covers the cost of electricity. If, however, we will (...) Read more? Sign up for free
 

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