5.4: Costs Flashcards
Uses of cost data? (5)
Aid ‘profit equations’, to calculate profits and losses
Aid profitable decision making
Aid other departments e.g marketing departments to make pricing decisions
To make comparisons from previous years
To forecast
What are the cost classifications? (4)
Direct cost
Indirect cost
Fixed cost
Variable cost
Def. Direct cost
- These cost can clearly identify with each unit of production
e.g one direct cost to business studies department is the salary of the business teacher.
Def. Variable cost
Costs that vary with output. E.g Costs of raw materials.
Not all direct costs are variable costs. For example, if a hotel buys a new juicing machine for the bar department, this is a direct cost to that department - but the cost of the machine will not vary with the number of orange juices being served.
Def. Indirect cost
- Costs that cannot be identified with a unit of production
e.g Indirect cost to a garage is the rent
Def. Fixed cost
Costs that do not vary with output in the short run. E.g. Rent
Def. Break even point of production
The level of output at which total costs equal total revenue - neither a profit nor a loss is made.
What are the two ways break even analysis can be undertaken?
The graphical method
* The equation method
What are the three lines of information break even chart shows?
Fixed costs
Total costs
Sales revenue
Def. Margin of safety
The amount by which the sales level exceeds the break even level of output.
Equation for Total Cost, Total Revenue, Variable Cost, Break Even Quantity?
Total Cost = Fixed costs + Variable Costs
Total Revenue= Price x Quantity Sold
Variable Cost = Quantity Sold x Avg Variable Cost
Break Even Quantity = Fixed Cost / (Price - AVC)
Break Even analysis reliability?
Costs and revenues may not always be in a straight line. For example costs can be affected by the output production which may not be smooth.
Not all costs can be classified into fixed or variable.
It is unlikely that fixed costs will remain the same.
