Costs- Chapter 28

Question 1

Distinguish between Direct and Indirect costs?

Answer 1

DIRECT: these costs can be clearly identified with each unit of production and allocated to a cost centre.
E.g one of the direct costs of a hamburger in a fast food joint is the cost of the meat.

INDIRECT: these costs can’t be identified with a unit of production or accurately allocated to a cost centre

E.g one indirect cost to a farm is the purchase of a tractor.

Question 2

Distinguish between Fixed and Variable costs

Answer 2

FIXED: costs that don’t vary with output in the short term.

VARIABLE: costs that vary with output

MARGINAL cost is the extra cost of producing gone more unit of output

Question 3

Define what a Cost centre, profit centre, overhead and unit costs are as costing methods?

Answer 3

Cost centre: section of a firm (department) where costs are allocated and charged.

Profit centre: selection of a firm where both costs + revenue is allocated and profit is calculated!

Overheads: classified into 4 groups:
Production, Selling/Distributing, Administration and Finance Overheads

Unit cost: total cost of producing product / no. Of units produced

Question 4

Explain Break-Even graph (what’s in it) and what it’s used for?

Answer 4

Break-even is the level of output at which total costs = total revenue. Therefore neither a profit/loss is made.

Break even = fixed costs/(selling point-  variable cost)
Direct costs: labour + materials
Indirect costs: overheads (rent)
Fixed costs: rent of premises
Variable costs: direct cost of materials

FORMULAS
Sales revenue= selling price x output

Total variable costs= variable cost x output

Total costs= total fixed + total variable

Profit/loss made= Sales Revenue - Total Cost

Margin of safety = highest output- break even

Question 5

Why is cost data useful for managers?

Answer 5

Important knowing costs to make- pricing decisions/ whether production should be stopped or switched to other materials etc

Also important in comparing actual costs with original targets/budgets
Therefore able to set new targets/budgets

Question 6

Evaluate usefulness of break even?

Answer 6

• easy to interpret
• provides guidelines, especially to profit loss levels at diff rates of output
• assist managers in making important decisions such as location, whether to buy new equipment.

YET:
-straight like representation is unrealistic, as revenue could be easily influenced by price reductions made necessary to sell all units produce at high levels of output.

Unlikely fixed costs will remain unchanged at different output of levels up to max capacity