Marginal Costing (Break Even Analysis) Flashcards
What is a fixed cost?
Remains constant over wide ranges of activity (over a specified time period)
What is a variable cost?
Varies in direct proportion to the volume of activity (over a specified time period)
What type of costs will you have in short term vs long term?
In the short term some costs are fixed, but in the long term all costs are variable.
e.g. rent = fixed, direct labour = variable
How can you estimate fixed and variable costs if you only know the total cost?
Using the high-low method (4 steps)
1. Find the highest and lowest output levels
2. Find the difference
3. Calculate the variable cost per unit (VC/ unit)
4. Calculate the fixed cost by substitution
What is the formula for determining total cost?
Total coat = fixed cost + variable cost / unit x output
What type of approach is the concept of contribution?
A marginal/ variable costing approach
What is the formula for contribution?
Contribution (margin) = sales revenue less ALL variable costs
What does marginal costing tell us?
Highlights the significance of variable cost that changes in total in proportion to changes in the related level of total activity or volume.
Measures the MARGINAL effect of productions/ sales
- how profit will change by selling ONE additional unit of product
- how total cost will change by making ONE additional unit of product
What is the Break-Even point?
At the break-even point, no profit or loss is made, profit = zero
When will a company breakeven? (formula)
When:
Total contribution = fixed costs
Contribution/ unit x sales volume = fixed costs
Therefore -> Sales Volume = fixed costs/ (contribution / unit)
where sales volume = BEP
What is the break-even revenue?
Break-even revenue = fixed costs/ PV ratio
What is the Profit-Volume ratio?
PV ratio = (contributing/ unit) / (selling price/ unit)
