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Planned plant capacity utilization, variable and fixed cost

Category: Budgeting Methodology

When using quantities for indirect cost planning (i.e. in the example 36,000 machine hours for production activity 1, 9,000 machine hours for production activity 2, 180,000 m for production activity 3, 18,000 operator hours for production activity 4), these quantities have to originate from the annual production programme.

In planning this way, the quantities, simultaneously, represent the planned capacity utilisation, i.e. the use which is planned to be made of the available equipment. The degree of capacity utilisation, 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 valid for this planned capacity utilisation only.

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

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