Chapter 7 Flashcards
What is cost behaviour
Cost behaviour refers to how costs respond to a change in the level of activity ( such as production outputs) within the relevant range. A cost may rise, fall, or remain constant as activity levels fluctuate
What are variable costs?
Total Variable costs are those costs which vary to the volume of activity, like sales, that is, doubling the level of activity will double the total variable cost.
In a manufacturing business, for example, this would include raw materials used.
Variable costs vary in total as activity changes. On a per unit basis the cost stays the same as activity changes. If there is no activity there are no variable costs.
What are fixed costs?
Total Fixed Cost - is one which is not affected by changes in the level of activity, for a specified period of time.
Fixed costs are the same irrespective the volume of activity (for
example, rent; insurance; and staff salaries.)
How do total variable costs change in relation to activity?
Total variable cost changes as activity level changes.
How do total fixed costs change in relation to activity?
Total fixed cost remains the same even when the activity level changes.
How do variable costs per unit change in relation to activity?
Variable cost per unit remains the same over wide ranges of activity.
How do fixed costs per unit change in relation to activity?
Fixed cost per unit goes down as activity level goes up.
When units produced increase, variable cost per unit.
A) increase in proportion to the units produced
B) increase at a greater rate
than units produced
C) increase at a lesser rate than units produced
D) stay the same
D) stay the same
Which ONE of the following would be a fixed cost of a manufacturer of
filing cabinets?
a) Electricity consumed by production equipment
b) The rent of the factory
c) The cost of plastic packaging to wrap the finished product
d) The cost of metal needed to manufacture the filing cabinets
b) The rent of the factory
Fixed costs are usually characterised by:
a) Total costs that increase as level of activity decreases.
b) Total costs that increase as level of activity increases.
c) Unit costs that decrease as level of activity increases.
d) Unit costs remain constant.
c) Unit costs that decrease as level of activity increases.
What is the cost- volume profit (CVP) analysis which is used for short- term decisions?
the cost-volume-profit (CVP) model, reflects the effects of changes in an organization’s activities, such as sales volume, and of its prices and costs on profit.
The simplest CVP model assumes that the only activity that drives profits is sales volume.
How to calculate total revenue
How to calculate total cost?
What is the contribution margin
This is the difference between selling price and variable cost.
Contribution margin = selling price per unit - Variable cost per unit
What is the contribution margin ratio
The CM ratio is the proportion of the selling price that contributes to fixed overheads and profits. The contribution margin ratio is:
What is the break- even point?
• the level of activity at which a business makes neither a profit nor
OR
• the point where total sales revenue equals total costs (variable and fixed)
How to find the break even point?
Revenue = Variable Costs + Fixed Costs
How to find the break even in volume/ units sold
How to find the break even in sales £
How can a company set it self a target volume in units to achieve certain level of profits?
How can a company set it self a target volume in sales to achieve certain level of profits?
What is the margin of safety
Margin of safety is the excess of budgeted or actual sales over break-even sales. It is the amount by which sales can drop before losses begin to be incurred.
How is the margin of safety calculated
Margin of safety = Budgeted sales - Break-even sales
What are the 5 assumptions of the CVP (Breakeven) Analysis?
• Although the Breakeven model is a very strong tool, the output is
dependent upon the assumptions made by cost analysts. These assumptions include:
1. Selling price is constant throughout the entire relevant range
2. The only factor that affects total costs is change in volume, which increases variable and mixed costs.
3. Costs are linear throughout the entire relevant range
4. In manufacturing companies, stocks do not change (units produced = units sold)
5. In multi-product companies, the sales mix is constant
How to calculate target profit
Target profit
(Fixed Costs + Required profit) / Contribution per unit
The breakeven point can be defined as
a) the level of activity where cash flow is zero.
b) the level of activity where profits equal fixed costs.
c) the level of activity at which there is neither a profit nor a loss.
d) the level of activity where variable costs are covered by sales revenue.
C
- Which one of the following is the correct description of the break-even point? The break-even point is
a) where total revenue equals total variable costs.
b) where total revenue equals total fixed and variable costs.
c) where total revenue equals total fixed costs.
d) where total revenue equals total contribution.
B
- Which one of the following is the formula for calculating contribution per unit?
a) Variable costs per unit plus fixed costs per unit
b) Profit per unit plus variable costs per unit
c) Sales revenue per unit less fixed costs per unit
d) Sales revenue per unit less variable costs per unit
D
- Which one of the following best describes the margin of safety?
a) The formula [Fixed costs / (Sales revenue per unit - Variable costs per unit)]
b) The extent to which the total sales exceeds the total variable costs
c) The extent to which the total sales exceeds the total fixed and variable costs
d) The extent to which the planned volume of sales lies above the break-even point
D
Answer
The margin of safety reflects the level of risk attached to the planned output. A small margin of safety gives a business very little room to manoeuvre if costs increase more than anticipated, or sales volumes are less than forecast.
- On a cost-volume-profit graph, the break-even point is located
a) at the origin.
b) where the total revenue line intersects the volume axis.
c) where the total costs line intersects the pounds axis.
d) where the total revenue line intersects the total costs line.
d) where the total revenue line intersects the total costs line.
C
D
B
A
C
A
£0.10
The break-even point lies at the intersection of the total revenue line and the fixed cost line on a
CVP graph
A) True
B) False
B
The correct statement: The break-even point lies at the intersection of the total revenue line and total cost line (fixed and variable costs) on a CVP graph.
How to calculate contribution margin PER UNIT
Contribution margin per unit = Selling price - variable cost
What’s another way you can find out the break even point in £ using the break even in units
Break even point in units X selling price = break even point in £
