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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)