Professional Documents
Culture Documents
Basic Principles
Cost and expenses are segregated into fixed and variable elements.
Profit = Sales – Cost and Expenses
Profit = Sales – Fixed Cost – Variable Costs*
(*The term cost means costs and expenses)
Activities and operations are made within the relevant range.
Sales Px Sales Px
-Variable costs and expenses x -Variable costs of goods sold x
Contribution margin x Manufacturing Margin x
-Fixed cost and expenses x -Variable Expenses x
Income before income tax Px Contribution margin x
-Direct fixed costs and expenses x
Direct margin (or segment margin) x
-Indirect fixed costs and expenses x
Income before income tax Px
Variable Production costs refer to direct materials direct labor, and variable overhead
Examples of variable expenses are delivery expenses, salesmen’s commission, and packing supplies
Direct fixed costs and expenses are those that are directly related to the segment (i.e., division,
department, or product line); these costs are directly identified with the segment that once the segment
is discontinued, these costs are avoided.
Indirect fixed costs and expenses = sometimes called as allocated costs or unavoidable costs
Summary of costs and expenses behavior within the relevant range.