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  • Duncan McLeod

S&OP and the Financial Plan Contribution, Fixed Cost and Profit

Updated: Nov 17, 2022

To download a full, printable PDF version of the article, click here.


In this, the second article in the “S&OP and the Financial Plan” Series, I will review the relationship between Revenue, Variable Costs, Fixed Costs and Contribution and show how combining the S&OP plan with this data gives us the tools to synchronize our financial projections with the S&OP plan. This is not a “Supply Chain” article and I would appreciate you sharing it with your financial associates and have them forward their feedback to me on LinkedIn.


The difference between revenue and profit is cost, but what costs? The key points I want to cover in this article regarding costs and S&OP include:

  • Unit Costs (standard cost, average cost or any other fully loaded cost applied to a specific SKU) are misleading.

  • Costs should be classified as Variable and Fixed Costs, where Variable costs can be directly linked to the SKU, but fixed costs cannot.

  • Volume can vary within a range (the Relevant Range) for a given level of fixed cost

  • All Fixed costs are variable. The question is when.

  • With S&OP we can address the timing required to change fixed costs and address the impact of volume. Without this it is very difficult to understand the impact of Fixed Costs on profit.

In this article I hope to show you that linking Cost to S&OP is an excellent way to project future profit. But before we can understand how to link costs to S&OP, we need to dig a bit deeper into what makes up cost and what needs to be considered as we look at costs and their impact on profitability.


Traditionally, in the manufacturing environment, cost was looked at as the sum of the: Material, Labour and Overhead costs associated with producing the product. The material cost was based on the cost of procuring the materials, the labour cost was calculated based on standard production times and labour rates and the overhead costs were applied to the product based on a cost driver, typically direct labour as it was arithmetically the easiest. The relationship between the Overhead Costs (primarily fixed) and the driver is sensitive to volume and is usually set once per year based on a budgeted volume.


The result of this exercise was a “Unit Cost” (often referred to as the standard or average cost). Differences between earned costs and actual expenditures were charged to variance accounts and operations typically had to explain unfavorable variances. These variances were not predictable and had a significant “Surprise” impact on Profit. Sound familiar?