Practical Direct Costing

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Practical Direct Costing
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Lisena Giordano, Business Consultant, Italy

It solves the problem of classification of variable costs with nosubjective speculations.

It solves the problem of classification of variable costs with no subjective speculations
Are there any costs it is important to clarify the type of classification.
A blast furnace, to melt metals, which uses gas, electricity or coal, should consider this cost as variable as it varies with the production.
But it is practically not impute this cost directly in the invoice to the customer, so we use an unorthodox but effective method.
The reclassification of the income we bring this cost as FIXED.
Turnover 1,000,000 100%
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 MDC will use in the management of Estimates and Orders is 55%
Variable costs 450,000 45%
Contribution margin 550 000 55%
Turnover 1,000,000 100%
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, will put in the reclassification of income, the Electricity as a variable cost in the invoice without charging the cost to the customer, we get:
turnover 1,000,000 100%
Variable costs + Electricity 500 000 50%
Contribution margin 500 000 50%
Fixed costs 200,000 20%
Operating profit 300 000 30%
But the contrast medium that we use in the management of Estimates and contracts is no
more than 50% to 55%
Variable costs 450,000 50%
Contribution margin 450 000 50%
sales 900,000 100%
So adding to the cost variables, the percentage value of the contribution margin, we get the money, but in this case the price does not include the cost of electricity.
Since the variable costs of less than 5% (electricity cost) the price will be lower than 10% (5% variable cost + 5% Contribution Margin).
This is because the variable cost is not charged in that order and not billed to the customer is classified as fixed, by doing so we have the real value of the highest contribution margin, which allows covering the cost in the price.

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