equations

Question 1

Sales revenue

Answer 1

sales price x no. of units sold

Question 2

Total variable cost

Answer 2

variable costs per unit x no. of units sold

Question 3

contribution per unit

Answer 3

sales price - variable cost per unit

Question 4

contribution margin

Answer 4

contribution/sales price x 100

Question 5

total contribution

Answer 5

total fixed cost + profit

Question 6

breakeven units

Answer 6

fixed cost/contribution per unit

Question 7

sales revenue at BE

Answer 7

BE in units x selling price

Question 8

Margin of safety (MoS %)

Answer 8

MoS units/Expected sale units x 100

Question 9

Target profit

Answer 9

(Fixed Cost + Target profit) / Contribution per unit

Question 10

Overhead absorption rate (OAR)

Answer 10

total overhead hours/ total machine or production hours

Question 11

indirect production costs

Answer 11

prime costs + production overhead each unit

Question 12

prime costs

Answer 12

material cost + labour costs

Question 13

overhead costs

Answer 13

machine hours x OAR

Question 14

Overhead per unit

Answer 14

total overhead/ units

Question 15

ARR (Average rate of return)

Answer 15

average annual operating profit/ average investment x 100

Question 16

What does it mean to have a higher breakeven point?

Answer 16

company faces greater challenges in covering its FC and achieving profitability

Question 17

What does it mean to have a higher profit?

Answer 17

• good financial health
• growth in opportunities
• competitive advantage

Question 18

what are the advantages of traditional costing?

Answer 18

• simplicity (single cost driver e.g. direct labour hours)
• familiarity (used for years by accountants and managers)
• cost reduction (fewer resources needed and less specialised expertise)
• consistency (based on predetermined overhead rates)

Question 19

what are the advantages of ABC system?

Answer 19

• accurate cost allocation
• insight into cost drivers
• enhancing decision-making
• improved cost control
• better performance measurement

Question 20

what are the disadvantages of ABC system?

Answer 20

• complex and time-consuming
• subjectivity in cost allocation
• resistance to change (from employers as they are so used to using the traditional method)
• data requirement (needs accurate and detailed data that can be challenging to collect and maintain)

Question 21

What are the disadvantages of traditional costing?

Answer 21

• allocation distortion (distortions in product costs)
• ignores modern manufacturing processes
• inaccurate product costs
• limited strategic insights (limited insight into cost behaviour so hard for managers ti identify opportunities for cost reduction)