COSTING Flashcards
COST BEHAVIOUR-
Managers in Events Management organisations are constantly having to make:-
Decisions about selling prices, based upon knowledge of variable costs and fixed costs.
How to acquire and use economically company resources to achieve company objectives.
They must be able to accurately predict levels of cost and revenue based on decisions made/ to be made. These decisions would include:
How many units should be manufactured- which product (type)- when?
Should the selling price be increased or decreased, and what would the effect on the volume of sales?
Should there be a loss leader?
Should advertising and sales promotions be increased?
TYPES OF COSTS
TYPES OF COSTS.
Within most organisations, costs tend to follow two patterns:
where costs tend to remain constant, regardless of operating level - these are known as fixed costs.
where costs tend to vary with changes in operating level - these are known as variable costs.
FIXED COSTS
FIXED COSTS . These costs remain constant, they do not vary with the level of output Examples of fixed costs would include: Rent. General Rates. Building Insurance. Depreciation. Licences.
VARIABLE COSTS
VARIABLE COSTS.
These vary directly with and proportionately with the level of output.
Examples of variable costs would include:
Labour used in production.
Materials used in production.
Machine Power.
After Sales Packing .
SEMI FIXED OR SEMI VARIABLE COSTS.
SEMI FIXED OR SEMI VARIABLE COSTS.
Costs with both a fixed and variable element. For example,
A BT fixed line telephone bill consists of a fixed line charge and then a variable element, where calls are charged based on the number of minutes used (activity).
Wages too can be semi-variable, where there is a fixed payment for work (salary), with an overtime element where extra hours are worked in addition to the terms of the employment contract.
STEPPED COSTS
STEPPED COSTS.
Where the costs increase when certain levels of activity are achieved.
Examples of stepped costs would include:
Supervisors.
Additional power generators.
Storage space, such as commercial drinks coolers, extra coolers are used as the number of customers at an event increases.
Safety stewards, similar to storage space, as a manager you will have to budget for extra safety stewards as the number of people for an event is forecast to increase. For example, if you are running a small activity event for children, then you would employ child supervisors on a ratio of, say 1 supervisor for up to 10 children as more children sign up for your event and you have 12 children attending, then you would need to have 2 supervisors.
Other simple things such as flowers on a event dining table. Typically, dining tables at an event will seat 10 people, as more customers sign up then additional tables will be required to accommodate them, and so additional flowers will be needed for each of the additional tables.
COST- VOLUME- PROFIT ANALYSIS.
an understanding of the behavior of cost is an essential management skill needed in decision making. Predicting the effect on cost, revenue and ultimate profitability outcome on the decision made.
Break-Even Point Analysis (BEP)
Your company produces a single product- The selling price is £10 per unit, fixed costs are £20,000 per annum and variable costs are £6 per unit.
How many units do we have to sell to fully recover our fixed costs?
How many units do we have to sell to make a profit of £10,000?
Solution.
Selling Price per unit = £10
Variable costs per unit = £6
The company makes a contribution per unit of £4
Answer 1 = £20,000 divided by £4 = 5,000 units
Exam tip- check the answer you have.
Answer 2 = £20,000 + £10,000 = £30,000 now divide by £4 = 7,500 units
Exam tip- check the answer you have.
You have just calculated the following formula: -
Break-even point (in units) = Fixed Costs .
Contribution per unit
Target profit (in units) = Fixed Costs + Required Profit
Contribution per unit
QUESTIONS
Question.
Your company produces a single product- The selling price is £10 per unit, fixed costs are £20,000 per annum and variable costs are £6 per unit.
How many £ sales do we have to achieve to fully recover our fixed costs?
How many £ sales do we have to achieve to make a profit of £10,000?
Solution.
Selling Price per unit = £10
Variable costs per unit = £6
The company makes a contribution per unit of £4
Answer 1 = £20,000 divided by £4 = 5,000 units @ £10= £50,000
Exam tip- check the answer you have.
Answer 2 = £20,000 + £10,000 = £30,000 now divide by £4
= 7,500 units @ £10 per unit = £75,000
Exam tip- check the answer you have.
You have just calculated the following formula:-
Break-even point (in sales value) = Fixed Costs . x Sales Price
Contribution per unit
Target profit (in sales value) = Fixed Costs + Required Profit x Sales Price
Contribution per unit
PROFIT VOLUME RATIO
PROFIT VOLUME RATIO ( P/V Ratio ), sometimes called C/S ratio
P/V or (C/S) Ratio = Contribution % as a percentage
Sales
Exam tip:- confused over terminology, this ratio is also called the C/S Ratio:
for profit read Contribution
for volume read Sales
for ratio read percentage
Now calculate the P/V Ratio from the example above:
P/V Ratio = Contribution % as a percentage
Sales
= 4 = 40%
10
VARIABLE COST RATIO
VARIABLE COST RATIO ( V/C Ratio)
Variable Cost Ratio = Variable Costs %
Sales
In our example,
= £270,000 = 60%
£450,000
Note: P/V ratio + V/C ratio must equal 100% - check the answer.
40% + 60% = 100% .
CONTRIBUTION – contribution of the production mix
Contribution x Monthly = Total
per Unit Production Contribution
CONTRIBUTION
Selling - Variable = Contribution
Price Cost per Unit
AVERAGE CONTIBUTION
Average Contribution = Total Contribution =
Total Production
Break-Even point,
FIXED COSTS
Average Contribution
