Cost Behavior: Airbus Case Study

Introduction to Cost Behavior

• Cost-Volume-Profit (CVP) relationships are fundamental to business operations.
• Understanding how costs behave is key to making informed decisions that affect profitability.

Airbus Case Study

• Airbus, a European aerospace company, surpassed Boeing in 2019, delivering a record-breaking 863 aircraft.
• Despite €70 billion in 2019 revenues, Airbus faced losses due to the COVID-19 pandemic grounding commercial airlines in 2020-2021.
• Airbus decided to discontinue the A380 jumbo jet model despite its large capacity (850+ passengers) and amenities.
• Airbus spent between €25 and €30 billion to develop the A380.
• Only 251 A380s were sold out of the initially forecasted 1,200 planes.
• Emirates was the biggest buyer with 123 planes, followed by Singapore Airlines with 24.
• No U.S. airline purchased the A380.
• High research and development costs for the A380 exceeded initial estimates.
• High operational costs dampened enthusiasm from airlines and airports.
• Emirates made profitable use of the A380 due to reaping economies of scale in maintenance and crew costs from a large fleet.
• Intense competition from Boeing requires Airbus to control costs and understand how aircraft operational costs impact customer decisions.

Cost Behavior and Decision Making

• Management accounting helps managers understand cost behavior to inform decisions about production and service activities.
• Examples of analysis include the cost for Boeing to produce each 787, the incremental cost for Ryanair incur when adding a passenger, etc

Identifying Key Factors

• Managers identify key activities performed in the business.
• Resources used in performing those activities are also identified.
• Managers then determine the costs of the resources used.
• Examining cost drivers, which are measures of activities that require resource use, are also identified.
• Identifying the best cost drivers is needed to allow managers to control costs.
• A cost driver example for Airbus is the act of installing seats. Airbus purchases seats from a subcontractor, incurring seat costs. The cost of labour is required to install the seats. The number of seats installed is the cost driver for its costs.

Linking Resource Costs to Outputs

• Exhibit 2-1 illustrates how activities link resources, their costs, and the output of products or services.
• Exhibit 2-2: Examples of resource costs and potential cost drivers for value-chain activities are listed.

Variable vs. Fixed Costs

• Variable costs change directly with the cost driver eg. sales staff being paid commission.
• Fixed costs remain unaffected by changes in the cost driver eg. Ace & Tate renting a factory - the factory rental cost remains fixed regardless of output, as relates to cost driver.
• Terms fixed and variable apply to total costs, not per-unit costs.
• Variable costs per unit remain constant.
• Fixed costs per unit decrease as activity increases.

Airbus Example: Receiving Activity

• For cost planning and control, managers focus on production activities and related resources.
• The recieving activity and managers must determine how it affects production costs.
• Impact of receiving activity on factors like: Equipment lease payments, equipment fuel costs, or receiving labour costs are a consideration.
• Exhibit 2-4 describes the relationship between resource costs and the receiving activity (example of cost-driver).
• Exhibit 2-5 illustrates the relationship.

Total costs of Recieving Activity

• Equipment costs are fixed at €45,000.
• Fuel costs are variable at €0.66 per part received.
• Total equipment and fuel costs for receiving 30,000 parts: €45,000 + (30,000 x €0.66) = €64,800.

Problem: Total costs & Cost per unit

• The manager at the Airbus assembly plant in Toulouse is looking at a monthly report of plant costs. He's interested in how total and unit cost of the receiving activity costs change.
• Parts received per month range from 10,000-30,000.
• Exhibit 2-5 shows total cost increases with activity, but less proportionally.
• This is due to the presence of both fixed (equipment) and variable (fuel) costs.
• Cost per part decreases due to fixed costs being spread across higher volumes.

Cost Behavior Considerations

• The use of costs should be considered in the decision-making process
• Cost behavior depends on management decisions.

Fixed Costs & Limits

• Fixed costs are unchanging within limits.
• This is dependent on the relevant range.
• If there's increased production due to requiring addition space, fixed costs will ultimately increase as well because of this.
• Exhibit 2-6: Graphs show refined, simplified descriptions of cost behaviour and the relevant range.

Variable Costs in Decision Making

• Relevant range applies
• e.g. If Osram obtains volume discounts, costs will be lower & slope less steep.. -e.g. labour decreases as greater levels of production mean greater labour efficiency. -When costs vary with cost driver BUT NOT in straight line fashion, it won't produce straight line graph

Step Costs

• Some costs are neither purely fixed or purely variable
• Step Costs are fixed costs at different levels of activity to resource availability -For a LIMITED single step range its a FIXED cost.
• Multiple Range behaves as VARIABLE Cost

Mixed Costs

• Contain elements of both fixed and variable costs. -Fixed element costs are always unchanged re activity , i.e capacity
• Variable varies proportionately ie capacity Example being diagnostic imaging with Fixed = Equipment Ready and Varibale = costs of power technicans and phsycians

Time Frame in decision making

Behave either fixed or variable dependant on time frame/affected decision, & magnitude of cost driver activity

• e.g. Long/ Large means variable costs appear more so -Small magnitude - more costs seem fixed behaviour.
• Cashier wages with large staffing decision has variable but fixed with decision span.

Example

-Transavia plane has empty seats, & traveller with ticket asks to hop on. Short is main variable costs are largely FIXED Longer with FIFA world cup needs greater timeframe etc, fuel & salaries are variable with new drivers

Cost Volume Profit -CVP

• Can take the shape of variable, fixed or mixed costs
• Developed assume the fixed costs components change in proportion to single costdriver Consider situation where managers look 2 assess change and effects of goods or services.
• i.e. increases from promotion OR decline market & econ decline -Manager focus on relationships between volume , expenses etc.

CVP - Scenerio

Miranda trying to decide if to rent new vending machines

• Snacks cost e1.50 average per unit.
• Acquisition cost of snack by .e1.20 unit are sufficient for analysis.
• She uses Revenue/ expense relationship.
• Volume or sales/cost expense income -CVP analysis. Objective 4 Create CVP graph etc

CVP Graph Relationship

Most students find it easier to begin with graphs then turn to equations (better method). Easier to visualize

• Draw axes horizontal = sales volume
• Vertical = revenue
• plot revenue volume select @ relevant range for sales 100k * sales revenue Draw line from 0 2 point
• Plot fixed draw horizontal @1800 fixed Point Where Fixed Intresects Axis & Point B

Continued CVP

Point C has Fixed + Varibale costs to Point B with .Fixed +Varible Costs for 0 units This show fixed + varible costs in terms of v between 0 - 100k units. Volume Sales -Revenue =Total cost & hence Net Income ==0, Point is labeled Point D CVP ANALYSIS or Break Even Analysis = MISLEADING AS IT REAEALS MORE THAN JUST POINT. @ volume acticity vetical distrevenue& Costs is Proft/ Loss @ THAT.

Business First: Pandemic Impact

Hotels & Auto makers cut costs during pandemic in 2019 Restrictions = Shift for firms Cut Costs to Break Even % is tolerable Autos reduced costs by 7% material Red. 5 %Fixed Based analysis set up follow: We Costs = variable levels

• Variable Costs = %To activity
• Revenue & costs Linera Prices remain constant , relevant range
• Sales Min Consant or not ? Sales M.X Consitues Total

Computing the costs

• WE Next Compute point equation is decribe Objective5
• CVP with Disucssion = begins / method Focus & Leads,
• General Eqaution aapproach Equation Form states sale -varibla expenses FIXED
• Expencses = Net INcome
• Break Even Set NI RHS =zzero sa Varibls etc

Equations

• Contribuiton MAring Methods
• Unit sales * Price or marginal unit that generates NI When REACH BREAK We sell Enoguh - Total & unit contrubtyin @

Formla

varible -Variable = % by total divided toals time -Comtribution M % = Toal by Toal Salles

• Express as raitios by vaiable cost Now solves Without Cmoputing Now Le't
• Break Eeven saels
• Break Even total + ficeds by

From this can work formula short cut

B/E 1S FIXED Cost + Unit Sales Revune Fixed & Cost Raitios

• General Vs Mraing method _ USE WHIHC EVER easier - personal PREFERENCE

Set Saels revenue needed

• to break = Varuble fixed cosrt =o
• Contribtuion margin S ( saels0 9 eruo % is available

Relashio

ship be teqauation and 2 methods apecific and 4

• From THese EQ

Shorter formulas

.Sales volume is fixed Shoudl use to get the best out of equations Pearson Benelux B.V. (Zweigniederlassung Deutschland).