Chapter 31: Costs Flashcards
Break-even point
The level of output at which total costs equal total revenue, when neither a profit nor a loss is made
Uses of cost information
Calculation of profit or loss
Pricing decisions
Measuring performance
Setting budgets
Resource use
Making choices
Types of costs
Direct costs
Indirect costs
Fixed costs
Variable costs
Total costs
Direct costs
Costs that can be identified with each unit of production and can be allocated to a cost centre
Cost centre
The section of the business that incurs the costs
Indirect costs (Overhead costs)
Costs that can not be identified with a unit of production or accurately to a cost centre
Fixed costs
These costs do not change when the level of output changes in the short term
Variable costs
Costs that vary with output
Total costs
Variable costs + fixed costs
Direct costs + indirect costs
Profit centres
A section of a business to which both costs and revenue can be allocated so profit can be calculated
Benefits of using cost and profit centres
Managers and workers have targets to work towards
Targets can be compared to actual performance
Individual performances can be measured
Work can be monitored and decisions about the future
Types of overheads
Production overheads: factory rent
Selling and distribution overheads: Packing/warehouses
Administration overheads: office rent, executive salaries
Finance overheads: Interest on loans
Average cost
Total cost of producing the product
///
Number of units produced
Full costing
All indirect and direct costs are allocated to the products, services or divisions of a business
Stages in full costing
Identify and add up all direct costs
Calculate total overheads for a given period
Add the total costs of making the product
Calculate the average cost
Uses of full costing
Relevant for single-product businesses
All costs are allocated, no costs are left out of total costs
Good basis for pricing for single-product businesses
Can be compared to assess performance
Limitations of full costing
Inappropriate overhead allocation can lead to issues
Can be risky to use this in making decisions
Essential to allocate overheads on the same basis over time
Contribution costing
Allocates only direct costs to cost centres and profit centres, not overhead costs
Marginal cost
The additional cost of producing one more unit of output
Use of average cost
To calculate price
Uses of total cost
Calculating profit or loss
Setting budgets
Use of marginal cost
Decision-making when contribution costing is used
What are the uses of accurate cost information?
Calculation of profit
Pricing decisions
Measuring performance
Setting budgets
Resource use
Making choices
What is the break even analysis?
The break even analysis uses costs and revenue data to determine the break even point of production
What is the break-even equation?
Fixed costs over the contribution per unit.
The contribution per unit can be calculated by- the unit price minus the variable costs
Break-even point (revenue)
BEP (units) x selling price
Profit using contribution
Contribution - total fixed costs
Total contribution
total revenue - total variable costs
Margin of safety
The amount by which the sales level exceeds the break-even level of output
Uses of break-even analysis
Provides guidelines to management on break-even points
Comparisons can be made between different options
The equation produces a precise break-even result
