International Journal of Management (IJM), OF MANAGEMENT (IJM) INTERNATIONAL JOURNAL ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume

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USE OF THE MIX-BASED COSTING MIXBC TO DETERMINE PRODUCT PROFITABILITY, LEVEL OF ATTRACTIVENESS AND SYNERGY OF THE PRODUCTION MIX LEANDRO TORRES DI GREGORIO, M.Sc. GraduateProgram Civil Engineering Fluminense Federal University, Niteri, RJ, leandrogregorio@ig.com.br Address: Rua Primeiro de Janeiro, 43, Vila Madalena, Belford Roxo, RJ, Brazil, CEP 26130-320, Telephones: +55 (21) 3775-6862 / +55 (21) 9647-3566, Fax: +55 (21) 3775-6862 CARLOS ALBERTO PEREIRA SOARES, D.Sc. Graduate Program Civil Engineering Fluminense Federal University, Niteri, RJ, carlos.uff@globo.com Address: Rua Passo da Ptria, 156, So Domingos, Niteroi, RJ, Brazil, CEP 22320-000, Telephone: + 55 (21) 2629-5410

ABSTRACT By analyzing different production scenarios, MIXBC allows the distribution of costs and indirect costs to products without the subjectivity and uncertainty typical of traditional apportionment. After a bibliographic research on costing methods / philosophies and an analytical deduction of the MIXBC method, the method was applied to the items that make up the assets (cash, inventory, receivables, and fixed asset assets). The results were used to determine the product return rate. The concepts of synergy and level of attractiveness of the mix were also presented and demonstrated. These concepts are useful to evaluate the performance of the production mix.

Keywords: Cost management. Rate of return. MIXBC Mix Based Costing. Mix synergy. Level of attractiveness of the mix

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

1. INTRODUCTION
The aim of this paper is to demonstrate the possibility of using the Mix Based Costing (MIXBC) method to calculate product profitability, synergy, and level of attractiveness of the mix. These last two parameters were defined so as to show the performance of the production mix. The major drawback of all costing methods is that they include subjective and arbitrary elements in the determination of production costs when dealing with the apportionment of indirect costs. The uncertainties of this process lead to imprecise evaluations on product profitability and consequently on production strategies, particularly when the parameter expenses is involved. This problem is aggravated by the difficulty of apportionment. Besides, the sharing of the infrastructure and of the resources by the production mix causes effects that are not well understood. There is a lack of parameters that reflect more clearly the mix performance. The aim of this paper is to demonstrate that the Mix Based Costing (MIX BC) method allows the full calculation of product profitability based on the distribution of indirect costs, indirect expenses and assets to products. Another aim is to present the synergy and level of attractiveness parameters for the production mix. These parameters, calculated from the results of the MIXBC method, are important in the evaluation of the mix performance. The methodology adopted was bibliographical research, followed by an analytical approach in which the results of the MIX BC were applied to the calculation of product profitability, synergy, and level of attractiveness of the production mix. The advantages resulting from this work include the improved quality of accounting information on product profitability and production mix performance, thus contributing to more profitable production strategies. 2. COST ACCOUNTING AND PRODUCTION STRATEGIES The purpose of costing methods is to determine how costs should be allocated to products. At present, absorption costing is the only method legally accepted in Brazil for financial accounting purposes, but it presents strong managerial limitations. This method consists in the appropriation of all production costs to the products produced, and only those of production (MARTINS, 2010). Absorption costing philosophy is not concerned about the distinction between fixed and variable costs. Its basic premise is the separation of costs from expenses with the sales generated, and expenses are recorded directly in the result of the period (BEUREN, SOUZA and RAUPP, 2003).HORNGREN, FOSTER and DATAR (2004) state that [] absorption costing is the inventory costing method, in which all manufacturing costs, variable and fixed, are considered countable costs. That is, inventory absorbs all manufacturing costs. It is the only method accepted for tax purposes in Brazil. AZEVEDO, GOUVA and OLIVEIRA (2006) point out that absorption costing is useful in the evaluation of business inventory and in aiding price decision taking for products and services, provided the part apportioned be small. For managerial decision taking, however, complementary information is necessary. SILVA (1998) mentions that absorption costing cannot be used indiscriminately, without taking into consideration problems that may be entailed, particularly its incentive to overproduction. Another system widely used is Variable Costing. ANDRADE, BATISTA and SOUSA (2004) suggest that this system tries to reduce the distortion present in the
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

apportionment required by the absorption costing system: [...] In the absorption costing system, fixed costs are apportioned to products and/or services, whereas in variable costing these costs are treated as expenses and as such are recorded directly in the result. It is clear then that different methods may result in significantly different interpretations, particularly as regards product profitability. Product profitability is a crucial parameter in decision making of production volume (the amount of products to be manufactured in a certain period of time) and of business strategies. In this context, Cost Accounting plays an important role, and when used with a costing system that is both efficient and coherent with the characteristics of the organization it provides an understanding of product profitability, and of possible ways to reduce costs. BEUREN et al.(2003) state that cost information may be useful in cost structure reduction, expansion of production capacity, launching of new products or calculation of sales price. 3. MIX BASED COSTING METHOD MIX Based Costing is a costing method that allows the reduction of uncertainties caused by arbitrary apportionment of indirect costs and expenses in product cost. The MIX-Based Costing method was built on the analyses of the product mix (rather than on that of products individually), and also on the hypothesis that the absence of a certain product in the mix provides clues as to the degree of utilization of shared costs (costs shared by one or more products, usually indirect) by that particular absent product. MIX BC allows costs and indirect shared expenses which cannot be actually separated for each product to be treated in a mathematical and coherent way. MIX BC contrasts, then, with the other methods, which usually apportion or track expenses. In this sense, MIX BC is an apportionment-free costing system, since the uncertainties are calculated by a process of cost inference, based on the exclusive production (only the product analyzed is produced) and excludent production (only the product analyzed is not produced) scenarios. The distribution of fixed indirect costs Let us examine the hypothetical case of a business that produces three products (exemplified as Alpha, Beta, Gamma), which have total fixed costs (CF) and fixed expenses (DF). Thus, the total fixed cost (CF) of the Product Mix (Alpha, Beta, and Gamma) can be written as: (Eq. v)

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

Figure 1 Graphic representation of the universe of fixed costs for a business which produces products Alpha, Beta, and Gamma Source: authors Considering the situation in which product Alpha is discontinued by the business and its production is not substituted by any other product, the new distribution of fixed costs would be:

Figure 2 Graphic representation of the universe of fixed costs for a business which produces products Beta, and Gamma Source: authors
The total fixed cost for the new product mix (only Beta and Gamma, without the participation of Alpha) can be written as: (Eq. vi)

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

Substituting Eq. vi in Eq. v: (Eq. vii) This result can also be considered as the Minimum Fixed Cost that can be ascribed to product Alpha ): (Eq. ix) On the other hand, if there were only product Alpha (without the other mix products), the fixed costs related to it would be maximum and would be calculated by: (Eq. x) Substituting Eq. ix in Eq. x: (Eq. xi) In which the term could be considered as the range of variation of fixed costs for product Alpha and it represents the extent of use of the mix structure by product Alpha, or the extent to which product Alpha depends on the mix structure. The fixed cost of the structure shared by the product mix can be defined by: (Eq. xviii) Applying the same reasoning and substituting in Eq. v: (Eq. xix) That is, the fixed cost of the structure shared by the mix can be determined by subtracting from the present situation the minimum fixed costs for each product (determined by the scenarios of absence of each one, sequentially). ( Eq. xx) Thus, (Eq. xx-a) Generalizing for a mix of N products: (Eq. xxi)

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

As previously seen, the ranges of fixed costs for each product ( show the utilization of the mix for each product, respectively. Thus, the following equation defines the degree of use of the Mix for product I, based on costs (UC): (Eq. xxii) Thus, in order to define the participation of each product in the Fixed Cost of the Mix (the amount each of them absorbs from the mix, when compared with the remaining products), it is necessary to normalize the UC parameter, obtaining what was called FACTORS OF COST PARTICIPATION (FPCs), that is: (Eq. xxvi) Thus, the total fixed cost for a particular product in terms of its shared structure in the mix can be written as: (Eq. xxx) CHECKING COHERENCE The situations in which the model loses its coherence may be due to misevaluation by the cost analyst, or due to a degree of coherence that is not easily perceived by the analyst, thus inducing to error. Individual conditions o In the exclusive production scenario for product i, resources should not exceed amounts available in the mix; o In the excludent production scenarios for product i, resources should not exceed the amount available in the mix; o In the exclusive and excludent scenarios for product i, resources should not be lesser than the amount available in the mix; o For a certain product, the maximum resources should be greater than the minimum resources defined from the mix; Collective condition: Resources shared in the production mix should not be negative.

APPORTIONMENT OF FIXED EXPENSES Fixed expenses can also be analyzed in the light of MIXBC, that is, by applying the same sequence of reasoning used to solve the problem of fixed costs. In managerial terms, applying MIXBC to fixed expenses is extremely reasonable, since in a business, every expenditure (cost or expense) exists (or should exist) to somehow make possible the production and commercialization of one or more products. From this point of view, it is reasonable to associate expenses to products, which is possible with the MIXBC method.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

Applying the MIXBC to fixed expenses (DFs), the following equations for product i of a Mix of N products are to be found: (Eq. xxxiv) (Eq. xxxv) (Eq. xxxvi) (Eq. xxxvii) Likewise, the degree of use of the structure (U) and the participation factor (FP) must be calculated using the parameter Fixed Expenses, expressed as: (Eq. xxxviii) (Eq. xxxix) (Eq. xl) It must be pointed out that the MIXBC could have been applied to the fixed costs + fixed expenses set (and in that case participation factors corresponding to the whole set would be obtained, FPCDs), or it could have been applied separately to the fixed costs (with cost-specific FPs, FPCs) and then to the fixed expenses (with expense-specific FPs, FPDs). 4. DETERMINING PRODUCT PROFITABILITY
MARTINS (2010) stresses that the best way to evaluate the level of business success is to calculate its returnon the investment made. According to him, the Rate of Return (TR) is the ideal way to perform this task. (Eq. xli) The author further explains that profit calculation should not include Financial Expenses, since these are derived from Liabilities (financing) rather than from Assets (Investment). He then proceeds to state that a part of the return yielded by Investment shall be used to remunerate creditors equity (Financial Expenses) and another part shall be used to remunerate owners equity(Owners Net Profit). The total return, the sum of both parts, is what best defines global performance. The author ends by stating that the problem of using this idea for each product consists not only in assessing profit, but also in determining which investment belongs to each product.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

As demonstrated, the problem of profit assessment was solved by the MIXBC method. Investments (Assets) can also be separatedby using the same procedure. As an example, MARTINS (2010) subdivides Assets as Cash Assets, Inventory, Receivables (Net), and Fixed Assets (Net). He explains that Assets are general; Inventories contain raw material, finished products, and identifiable packages containing each product, and several materials for industrial use common to all; Receivables are all identified; finally, part of the Fixed Assets is made up of machinery and facilities identified with the products and the greatest part is common to all (products). It should be pointed out that in terms of the items of the Assets (Cash Assets. Inventory, Receivables and Fixed Assets) it makes no difference whether MIXBC is applied to each item as a whole or only to the common (shared) part of each product. This possibility happens because in the scenarios set by the method the identified part and the common part of each item can be readily differentiated. Applying MIXBC to the item Cash Assets (DIS) of the Assets: (Eq. xlii) (Eq. xliii) (Eq. xliv) (Eq. xlv) Now, the degree of use of the structure (U) and the participation factor (FP) must be calculated using the parameter Cash Assets, expressed as: (Eq. xlvi) (Eq. xlvii) (Eq. xlviii) Applying MIXBC to the item Inventory (EST) of the Assets: (Eq. xlix) (Eq. l) (Eq. li) (Eq. lii) Now, the degree of use of the structure (U) and the participation factor (FP) must be calculated using the parameter Inventory, expressed as:
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

(Eq. liii) (Eq. liv) (Eq. lv) There is no need to apply the method to the item Receivables (REC) since it is already identified for each product, according to the sales earned. Applying MIXBC to the item Fixed Assets (IMO) of the Assets: (Eq. lvi) (Eq. lvii) (Eq. lviii) (Eq. lix) Now, the degree of use of the structure (U) and the participation factor (FP) must be calculated using the parameter Fixed Assets, expressed as: (Eq. lx) (Eq. lxi) (Eq. lxii) The distribution of Assets (ATV) for each product of the example, according to the method, is: Table 1 Distribution of assets for each product, according to the MIXBC method Source: authors Assets CashAssets Inventory Receivables (net) FixedAssets (net) Total Assets Alpha (+) (+) (+) (=) (+) (+) (+) (=) Beta Gamma (+) (+) (+) (=) Total

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

Presuming that the results for each product ( have been previously obtained by applying the MIXBC method to costs and expenses, it is possible to calculate the return on investment for each product of the example (for managerial purposes) using Eq. xli: (Eq. lxiii) (Eq. lxiv) (Eq. lxv) The parameter Rate of Return for each product makes it possible to evaluate which product maximizes investment value. This evaluation constitutes important managerial information. 5. DETERMINING SYNERGY ATTRACTIVENESS AND LEVEL OF

Synergy derives from the Greek synerga, cooperation. It means that the effect resulting from the action of several factors that make up an action coordinated towards a common aim may be greater than that of all these agents acting individually. In terms of the production mix, synergy meansmore specifically the installed capacity (machinery, area occupied by production, etc), and the administrative and supporting structure (indirect labor force, fixed expenses, etc). Actually, everything that is shared in one way or another must presentsynergy, otherwise it would be preferable not to share at all. In other words, the effect of the shared structure must be that of reducing business operational costs and consequently generating an increase in efficiency, when compared with a structure which is not shared. Bearing this in mind, Synergy of Fixed Costs in the Mix (SIN_CF), that is, the amount saved by sharing fixed costs, can be defined as: (Eq. lxvi) In this equation, parameter represents the fixed costs necessary in a scenario in which there is only product i (exclusive production of i) and represents the total fixed costs of the mix. Additionally, Synergy of Fixed Expenses in the Mix (SIN_DF), that is, the amount saved by sharing fixed expenses, can be defined as: (Eq. lxvii)
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

In this equation parameter represents the fixed expenses necessary in a scenario in which there is only product i (exclusive production of i) and represents the total fixed costs of the mix. In this case, the synergy created by sharing costs and expenses are being analyzed, but there are other aspects of the synergy of the production mix (large-scale acquisitions, products with strategic positioning in the market) that are not discussed in the present article. Thus, the MIX SYNERGY, in terms ofsharing of production and administrative infrastructure, can be defined as: (Eq. lxviii) So far SYNERGY has been seen in absolute terms, but it can also be expressed in percentages. Expressing in percentages provides a more precise view of how the mix acts on optimization of resource consumption, when compared with the scenarios of exclusive production of products. SYNERGY in percentages can be expressed by the equation: (Eq. lxix) The LEVEL OF ATTRACTIVENESS OF THE MIX (GAT) is a parameter that can be used to evaluate and compare different mix arrangements, identifying which of them maximizes investment. It can be defined by: (Eq. lxx) 6. CONCLUSIONS
The MIX based costing is a method that allows product cost to be obtained from a sequence of analyses performed on the production mix. Its application is particularly useful for the treatment of indirect costs, in the hypothesis that the absence of a particular product in the MIX provides clues as to the degree of utilization of shared costs (costs that are common to one or more products, and that are usually indirect) for the absent product. The major advantage of the method may lie in allowing costs and indirect shared expenses which cannot be actually separated for each product to be treated in a mathematical and coherent way. MIX BC contrasts, then, with the other methods, which usually apportion or track expenses. In this sense, MIX BC is an apportionment-free costing system, since the uncertainties are calculated by a process of cost inference, based on the exclusive production (only the product analyzed is produced) and excludent production (only the product analyzed is not produced) scenarios.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

MIXBC can also be used to determine the profile of assets sharing according to product. The profitability of each product can thus be completely obtained, which was not previously possible using the other costing methods. It should be pointed out that MIX BC is a method strongly dependent on the experience and on the systemic vision of cost analysts, who should have an in-depth knowledge of the reality of the business operations. The good foresight of these professionals shall be responsible for building coherent scenarios of resource consumption, and the application of the method shall lead to the safe completion of the cost distribution task and to results free of arbitrary apportionments. It is recommended that the scenario analyses be performed by a multidisciplinary team, comprising professionals from human resources, production, and administrative managerial level. MIXBC can also be used to identify the synergy present in the use of the infrastructure and of production resources. It is also possible to compare different production mixes by means of the level of attractiveness of the mix. MIXBC is therefore a valuable managerial and strategic tool. It reduces the arbitrariness caused by apportionment,and therefore allows coherent product costing. It permits analyses of product profitability. It makes it possible to identify the amount of value aggregated by the production mix in the product structure, when different resources are shared. REFERENCES 1. ANDRADE, Nilton de Aquino, BATISTA, Daniel Gerhard and SOUSA, Cleber Batista de,2004,Vantagens e Desvantagens da Utilizao do Sistema de Custeio ABC, inPublicaes do 1 Seminrio de Gesto de Negcios da FAE, Curitiba, PR.Available at:http://www.fae. edu/publicacoes/pdf/art_cie/art_37.pdf[20 May 2011]. 2. AZEVEDO, Ana P. F., GOUVA, Josiane B. and OLIVEIRA, Ualison R., 2006,Custeio por Absoro X Custeio ABC, inAnais do 3 Simpsio de Excelncia em Gesto e Tecnologia SEGET, Rezende, RJ.Availableat: http://www.aedb.br/seget/artigos06/871 _CUSTEIO%20POR%20ABSORCAO%20X%20CUSTEIO%20ABC.pdf[20 May 2011]. 3. BEUREN, Ilse Maria, SOUZA, Marco A. B. de, RAUPP, Fabiano Maury,2003,Um Estudo Sobre a Utilizao de Sistemas de Custeio em Empresas Brasileiras, in AnalesdelCongresodel Instituto Internacional de Costos, n. 8, Puntadel Este, Uruguay. Availableat: http://eco. unne.edu.ar/contabilidad/costos/VIIIcongreso /110.doc[20 May 2011]. 4. HORNGREN, Charles T., FOSTER and George, DATAR, Srikant M., 2004, Contabilidade de Custos,Rio de Janeiro, RJ: Ed. Pearson / Prentice Hall. 5. MARTINS, Eliseu, 2010, Contabilidade de Custos: Livro texto, So Paulo, SP:Ed. Atlas. 6. SILVA, Csar A. T.,1998, Utilizao do Custeio por Absoro para Fins Gerenciais, Revista UnB Contbil, 1, 1. Available at: http://www.cgg-amg.unb.br/index.php /contabil/article/view/98/pdf_6[20 May 2011].

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