5.28 Costs Flashcards
Direct costs
Can be clearly identified with each unit of productio and can be allocated to a cost centre
Indirect cost
Costs that cannot be identified with a unit of production or allocated accuratly to a cost tre
Break even point of production
The level of output at which total costs equal total revenue - neither a profit nor loss is made
Margin of safety
The amount by which the sales level exceeds the break-even level of output
Contribution per unit
Selling price less variable costs per unit
Fixed costs
Costs that do not vary with output in the short run
Variable costs
Costs that vary with output
Marignal costs
The extrea cost of producing one more unit of output
Uses of cost data
+ Key factor in the “profit equation”
+ Important to other departments. e.g: Marketing for pricing methods
+ Allows comparison to be made with past periods of time –> measure efficiency and profitability
+ Set budget for the future
+ Comparing cost data to make decisions about resource use
+ Costs of different options help managers ti make decision and improve business performance
Break even analysis - further uses
- Marketing decisions - the impact of price increase
- Operation-management decision - the purchase of new equipment with lower variable costs
- Choosing bw 2 locations
- Point of profitability
+ of break even
+ Charts are easy to construct and interpret
+ Analysis provides useful guidelines to management on BE points, safety margin….
+ Comparisons can be made bw different options
+ Equation produces a precise results
+ Assist manager when taking important decisions
- of break even
+ Assumption that costs and revenues are presents in straight line –> unrealistic e.g: labour costs increases with output bc they have to work overtime
+ Not all costs can be classified into fixed and variable costs –> semi-variable costs
+ Assumption that all inventories will be sold –> unrealistic
+ Unlikely that fixed costs remain unchanged up to maximum capacity
