Below are the terms used to describe costs and leverage. This should help to understand the terminology in the current budget discussion. Please use this information as a reference. If there are any questions, please do not hesitate to ask.
â€œOperating leverage reflects the extent to which fixed assets and associated fixed costs are utilized in the business. A firm's operational costs may be classified as fixed, variable, or semivariableâ€ (Block & Hirt, 2005, p. 2). Fixed costs are â€œcosts that remain relatively constant regardless of the volume of operations. Examples are rent, depreciation, property taxes, and executive salariesâ€ (Block & Hirt, 2005, p. 652). ...view middle of the document...
Fixed and variable costs are used in this analysis to determine how much the organization needs to sell in order to be equal to the costs that were put into the product, hence the term break even. The analysis also helps to determine how much of a profit or loss the business will make.
The equation used to calculate the break even analysis is
BE = Fixed costs = Fixed costs = FC_ (5-1)
Contribution margin Price â€“ Variable cost per unit P-VC
Direct costs are â€œcosts that can be identified specifically with a particular sponsored project, or that can be directly assigned to such activity relatively easily with a high degree of accuracyâ€ (U.S. Department of Education, 2007, Â¶4). Some examples include supplies that are used for a specific project, the salaries of those people who will work on the project and expenses they incur. Direct costs are mostly variable costs, however â€œnot all variable costs are direct costs, for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but costs. Variable costs are sometimes called unit-level costs as they vary with the number of units producedâ€ (Wikipedia, 2008, Â¶1).
Indirect costs â€œrepresent the expenses of doing business that are not readily identified with a particular contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performsâ€ (U.S. Department of Education, 2007, Â¶1). Some examples include the costs of light, heat, personnel, administration, taxes, and security costs, simply fixed costs. The cost of operations and production need to be accounted for when doing the income...