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3. Different Cost Types as a Function of Different Decision-Making Situations

3.1. Introduction

General variability

In any given company there are a number of typical cost types which vary in tact with specific decisions: time horizon, product type, and production conditions, just to name a few.

o For a hotel, the cost calculation for a vacant room per night, depending on the decision-making occasion, could result in numbers as different as DKK 20 and 400.

o For an airline the calculation of costs per seat between Oslo and Copenhagen result in numbers as different as DKK 80 and 460.

o For Carlsberg the cost calculation of producing one premium pilsner result in numbers as different as DKK 0.80 and 2.20.

o For TDC the cost calculation for one minute of calling on the cellular net in numbers as different as DKK 0.15 and 0.65.

The decision-making occasion has to be specifically defined.

Cost types

Different cost types are composed of different integral aspects when examined from the perspective of specific decision-making occasions. Below, are a number of typical cost specifics:

Raw materials

Blue collar (hourly paid workers employed on short notice)

Production costs, direct

Production costs, indirect

Depreciation factors


Administration Research

Management, consulting, and accounting

3.2. Examining Different Cost Types

Raw materials

In regards to a specific decision-making situation, raw materials are a direct variable cost, i.e. the size of the costs are dependent on the size of production. For instance, plastic is a raw material when manufacturing plastic bowls, and the amount of plastic used varies directly with the production of the plastic bowls. This relationship is illustrated in figure 3.1:

Figure 3,1: Consumption of raw materials in production

Consumption of raw materials in production

Purchasing discounts

When a firm plans production, the cost of raw materials are partially dependent on whether or not purchasing discounts (quantity discounts) have been achieved, which generally appear in two different forms:

o Non-accumulated discount (normal discount): In this case, the firm only receives a discount for the part of the purchase that exceeds the discount boundary quantity. A normal discount could, for instance, be structured so that the plastic bowl manufacturer obtains a 15% discount on the portion of the purchases that exceed the discount boundary quantity of 1 metric ton per month. This situation is shown in figure 3.2:

Figure 3.2: Non-accumulated discount

Non-accumulated discount

o Accumulated quantity discount: In this case the firm receives a discount for the entire amount purchased, provided that the purchase equals or exceeds the discount boundary quantity. A 15% accumulated quantity discount could be structured so that the plastic bowl manufacturer obtains a 15% discount on all plastic purchased, provided that a minimum of 1 metric ton is purchased every month. This scenario is depicted in figure 3.2:

Figure 3.3: Accumulated quantity discount

Accumulated quantity discount

o The first of the two figures shows the accumulated quantity discount provided, which is regarded as a bonus sum, paid when the discount quantity is reached. Here, MC has a negative value, i.e. a negative cost (read: an income).

o The second figure shows the accumulated quantity discount where the last quantity purchased before the discount quantity is reached, is free of charge. This discount format should be understood in terms of the following example: if the plastic bowl manufacturer obtains an accumulated quantity discount of 15% when buying 1 metric ton, then the amount of the discount can be explained by the purchase quantity between 850 kg and a ton, being free of charge.

Under certain rare circumstances, it is possible to buy more product than needed, with the purpose of obtaining the discount limit. In these cases, though they seem somewhat unthinkable, the cost of destroying or transporting the excess quantity complicates the model to some degree. This situation is highly academic and will not be discussed in-depth here. For a theoretic explanation, albeit in Danish, is available found in "Opgaver i Erhvervsokonomi - med supplerende noter" af Michael Havsteen og Ove Hedegaard, DJ0F's Forlag 2003.

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