Module 13: Short Term Cost Behaviour Flashcards
What variable costs?
Vary with activity levels
Same per unit of output
What are fixed costs?
Accrue with passage of time and within certain limits
Unaffected by fluctuations in output or turnover
What are semi-variable costs
Fixed and variable element
What are semi-fixed costs (stepped)?
Increase at discrete activity levels
What is CVP analysis?
Cost
Volume
Profit
What assumptions CVP make?
Variable cost per unit is constant
Increases/decreases with sales volume
Total fixed costs do not change
Average selling price per unit constant and not affected by sales
Total sales rev increases/decreases with sales vol
CVP can assist in businesses calculating expected effect on profit of?
Change in mix Ads Sales promo and discount Price changes Method of paying salespeople
How to alternatively calculate contribution per unit?
Increase in profit £/increase in sales (units)
Contribution is calculated how?
Sales price-variable cost per unit`
How to calculate the C/S ratio?
Contribution per unit/sales per unit
What is the break even point?
Level of sales where profit is equal to 0 so won’t make a loss
Total costs = total sales
Total contribution= total fixed costs
Break even units?
Fixed costs/contribution per unit
Break even revenue?
Fixed costs/CS ratio
Target Profit?
Net profit
+ fixed costs
= required contribution
Cont per unit = X
required/x = units sold
What is the margin of safety?
Extent tow which sales may fall below their existing level before BEP point is reached
Units/£/% of existing sales level
Cushion to business
How to calculate margin of safety in units?
Units sold- break even units
Margin of safety in £?
Sales revenue - break even revenue
Margin of safety in percentage?
units sold - break even units/ units sold
OR
sales revenue-break even revenue/sales revenue
Limitations in the assumptions of CVP analysis?
Oversimplication to assume fixed costs are the same
Increase competition may require price discounts
Higher level of output, sales price may have to be reduced to win extra sales
Material £, wages, overheads may change
Material usage may change, scrap fall with improved methods
Efficiency may change with skilled labour
Overtime- higher labour
Product mix may change
