2. CVP analysis & STM decisions

Question 1

What is marginal costing?

Answer 1

• a costing technique
• uses cost behaviour at the margins of production to inform management in a short-term decision-making environment

Question 2

What is margins of production?

Answer 2

• one more or one less impact on profit
• when you look at production margins using marginal costing, seeing how profit changes by making one more or one less unit helps with short-term decisions
• shows how costs change when production levels are different

Question 3

What is cost behaviour?

Answer 3

• Used to describe how a cost is expected to react to changes in productivity
• fixed/variable
• helps inform short-term decisions by revealing how costs change with fluctuating production levels at the margins

Question 4

What is the formula for contribution?

Answer 4

Contribution = sales less variable costs

Question 5

What is the formula for C/S ratio ?

Answer 5

c/s ratio = contribution/sales x 100

Question 6

What is the formula for break-even points?

Answer 6

BEP (units) = fixed costs/contribution

Question 7

What are variable costs?

Answer 7

• directly linked to production activity and change in proportion to it
• making them relevant and responsive ti variations in the level of production

Question 8

What are fixed costs?

Answer 8

• termed as committed or sunk costs
• remain constant regardless of production fluctuations
• represent ongoing commitments
• can also be categorised as period-based, occurring over a specific time frame rather than tied to production changes

Question 9

What are semi-variable costs?

Answer 9

• exhibit both fixed and variable components
• they include elements that remain constant and those that change in relation to shifts in production activity

Question 10

Using a marginal cost analysis, fixed costs are:

Answer 10

• always treated as period costs and written off in full to the trading period
• never allocated/apportioned to individual products

Question 11

What is the formula for sales in cost analysis ?

Answer 11

sales = units sold x selling price per unit

Question 12

What is the formula for total variable costs in cost analysis ?

Answer 12

total variable costs = units produced x variable cost per unit

Question 13

What is the formula for gross profit in cost analysis ?

Answer 13

gross profit = contribution less fixed costs

Question 14

when is BEP reached?

Answer 14

• reached where total contribution = fixed costs
• beyond BEP : £1 contribution = £1 profit

Question 15

What is capacity?

Answer 15

• refers to the existing maximum production and/or sales levels a business can attain
• signifies the threshold where reliance on fixed and variable costs become uncertain
• making it vital to consider when analysing break-even, production capacity, and margin of safety for effective decision-making

Question 16

what is margin of safety?

Answer 16

• represents the cushion between a company’s production capacity and its break-even point, either in terms of sales or units
• provides insight into how far sales can drop before reaching the break-even level, guiding risk assessment and management decisions