Cost Flashcards
Cost centre
A section of a business, such as a department, to which costs can be allocated or changed
Profit centres
A section of a business to which both costs and revenues can be allocated-so profit can be calculated
Advantages of having a cost and profit centre
- targets to work towards
- way to monitor and control
- method to assess performance
- means to make decisions
Disadvantages of having costs and profit centres
- The concept of profit applies to the business as a whole
- Breaking into costs and profits distorts the holistic nature of business
- Not all influences on a centre are within the businesses control `
Cash flow forecast
A prediction of the future cash inflows and outflows for a business over a specified time period.
Fixed cost
A cost that will not change with an increase or decrease in the level of output
Variable cost
a cost that will vary directly with the level of output
Marginal cost
The additional cost of producing one extra unit of a product.
Semi-variable costs
A business cosst that will have a fixed cost element and a variable cost element.
Indirect costs
A cost that cannot be directly linked to the production of a particular product.
eg, rent, insurance premiums, wages of clerical staff
Total costs
Fixed costs + variable costs.
All of the costs involved in making a product or providing a service.
Average cost
TOTAL COSTS/ TOTAL OUTPUT
Contribution
The amount of revenue remaining after the deduction of variable costs.
This can be put towards covering the fixed costs of the business.
Contribution FORMULA
Fixed cost/ contribution per unit( selling price per unit- variable costs per unit)
Break even
The level of output at which total revenue= total costs
Full absorption costing
When all og the costs of a business are absorbed into the costs of the. products made. The cost will include a proportion of the fixed and variable costs of the business
unit cost FORMULA
total cost of producing/ number of units produced
Limitation of full absorption costing
Arbitrary or unfair allocation of costs
Does not allow exceptional order
penetration pricing cannot be used
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Contribution or marginal costing
Costing method that allocates only direct costs to cost/profit centres, not overhead costs
The calculation of the cost of producing an additional product
Contrubution fomula
Price- Direct cost per unit
Total contribution formula
Total revenue- Total Direct costs
