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.
1,000,000 100% turnover
Variable costs 450,000 45%
Contribution margin 550,000 55%
Fixed costs 200,000 20%
Electricity 50,000 5%
Operating profit 300,000 30%
The contribution margin the firm will use in its management of quotes and orders is 55% (because variable costs 450,000 45%, contribution margin 550,000 55% and
1,000,000 100% 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...