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Planned plant capacity utilization, variable and fixed cost

Category: Budgeting Methodology

When using quantities for cost indirect cost planning (i.e. in the example 36,000 machine hours for production activity 1, 90,000 m2 for production activity 2, 180,000 kg for production activity 3, 18,000 operator hours for production activity x., these quantities have to originate from the annual production programme.

In planning this way, the quantities, simultaneously, represent the planned capacity utilization, i.e. the use which is planned to be made of the available equipment. The degree of capacity utilization, as can be easily understood, influences the amount and structure of indirect cost which has to be planned.

Indirect cost planning, as in the example on Excel sheet TB, is therefore only valid for the capacity utilization planned.

The decision which costs at the given capacity utilization level behave “variable” and which behave “fixed” requires the design of a model which should not be too complicated. Such models are generally built assigning a certain variable/fixed behaviour to cost categories and using this assigned behaviour across the board for all functions. The example uses such a concept: costs have been assigned as 100% fixed, 50% variable/50% fixed or 100% variable (marked through colours) and the split has been calculated accordingly.

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