l4 : cvp analysis Flashcards
what are fixed costs?
costs that dont change with changes in the level of output over short periods of time. can change in LR due to production capacity or inflation.
how are fixed costs expressed on a graph?
y = a
what are variable costs?
costs that change in proportion to changes in the level of output
how are variable costs expressed on a graph?
y = bX
(assume a linear, proportional rs)
what are semi variable costs?
cost which is partially fixed and partially varies with output
how are semi variable costs expressed on a graph?
y = a + bX
give an example of a semi variable cost.
telephone costs (fixed basic charge + variable element depending on number of call outs)
what is a step cost?
cost which is fixed over a certain range of output, then increases as the quantity increases
how are step costs expressed on a graph?
shape of an upward staircase
what is the break even point?
level of production where total sales and total costs are equal. no profit or loss.
what is the margin of safety?
difference between break even sales level and normal level of sales
state the equation for deducing BEP.
Q = total fixed costs / (sales price - VC per unit)
state the equation to calculate contribution margin.
total revenue - total variable costs (in total)
sales price - VC per unit (per unit)
give five key assumptions in CVP analysis.
- linearity (assumes costs are linear & that costs can easily be divided into fixed & variable)
- all goods produced are sold
- no constraints on production from scarce resources
- quality of goods is constant
- tax is ignored. very important in practice
why is assuming linearity in CVP analysis bad?
assumes that unit variable costs remain constant for all levels of output, doesn’t consider possibility of economies of scale etc
