LESSON 29: How to model your direct variable costs; and Articles

LESSON 29: How to model your direct variable costs; and the three-step formula that ensures you get it ‘just right’ every time

 Before we start it is important to remember what was said in our discussion about the classification of costs as direct or overheads. If you recall, this was in the section on how to structure your Profit and Loss Account, and whether you identify gross profit. There we said that the decision as to which […]

29.1 Many direct costs vary in proportion to sales

 Sometimes the link between sales and costs is clear and straightforward. For example, if a second-hand car dealer sells a car the direct cost is the cost to the dealer of that car. The same would be true for any business buying things and then selling them on – e.g. a bookshop. It can be […]

29.2 Some direct costs will vary with sales, but the relationship will be weak

 In other cases, while there is clearly a relationship between direct costs and sales, the two do not move in the same proportion. For example, a cinema will buy the right to show a film, probably for a time period – suppose they pay £2,000 to be able to show a film for one week. […]

29.3 Linking your sales with your direct variable costs to produce sales/direct cost menus

 If you do have direct variable costs you will need to link these to the sales to which they relate. It is usually best if you start by expressing the relationships between sales and direct variable costs in numbers of units rather than in money. For example, if you buy and sell washing machines, in […]

29.4 Here it is – the infallible three-step formula

In order to mimic the way your direct costs behave you have to start by classifying your sales according to the type and value of their variable direct costs. This probably sounds very much more complicated than it actually is, so stay with it until you see that it is really quite intuitive. You just […]