28. Costs Flashcards
Uses of cost data
- To be able to take effective and profitable decisions
- For marketing department to decide on the price of the product
- Helps with budgeting
- Comparing cost data helps managers to make decisions about resource use
- Monitor and improve business performance, including using cost information to calculate profits
Define direct costs
These costs can be clearly identified with each unit of production and can be allocated to a cost centre
Define indirect costs
Costs that cannot be identified with a unit of production or allocated accurately to a cost centre
Define fixed costs
Costs that do not vary with output. e.g. rent
Define variable costs
Costs that vary as output changes, such as the direct cost of materials used in making the products.
Define semi variable costs
Include both a fixed and variable element. e.g. salesperson’s fixed basic wage with commission that varies with sales, advertising
Define marginal costs
Additional costs of producing one more unit of oupt, and will be he extra variable costs needed to make this extra unit
Problems in classifying costs
- Difficult to classify because some might overlap the other
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Define break even point of production
- The level of output at which total costs = total revenue - neither profit or loss is made
- Fixed/ Price - Variable
Define contribution per unit
Selling price mins the variable cost per unit
Define margin of safety
The amount by which the sales level exceeds the break even level of output
Limitations of breakeven analysis
- Variable costs can change quickly for example is the price of labour or raw materials rise. Will not change directly or smoothly
- Not all costs can be classified into fixed and variable
- No allowance made for inventory levels. It is assumed that all units produced are sold
- Unlikely that fixed costs remain unchanged at different output levels up to maximum capacity
