equations Flashcards
Sales revenue
sales price x no. of units sold
Total variable cost
variable costs per unit x no. of units sold
contribution per unit
sales price - variable cost per unit
contribution margin
contribution/sales price x 100
total contribution
total fixed cost + profit
breakeven units
fixed cost/contribution per unit
sales revenue at BE
BE in units x selling price
Margin of safety (MoS %)
MoS units/Expected sale units x 100
Target profit
(Fixed Cost + Target profit) / Contribution per unit
Overhead absorption rate (OAR)
total overhead hours/ total machine or production hours
indirect production costs
prime costs + production overhead each unit
prime costs
material cost + labour costs
overhead costs
machine hours x OAR
Overhead per unit
total overhead/ units
ARR (Average rate of return)
average annual operating profit/ average investment x 100
What does it mean to have a higher breakeven point?
company faces greater challenges in covering its FC and achieving profitability
What does it mean to have a higher profit?
- good financial health
- growth in opportunities
- competitive advantage
what are the advantages of traditional costing?
- 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)
what are the advantages of ABC system?
- accurate cost allocation
- insight into cost drivers
- enhancing decision-making
- improved cost control
- better performance measurement
what are the disadvantages of ABC system?
- 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)
What are the disadvantages of traditional costing?
- 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)
