Topic Four, Part 5 - Costing Methods Flashcards
What are indirect costs?
costs not attributed to a particular unit of output
What are Fixed costs?
do not change as output or sales change
What are variable costs?
costs that change in proportion to the level of production.
What are stepped fixed costs?
Purchase to increase output, increases fixed costs until investment pays off
What are direct costs?
costs that are directly attributable to a unit output
What is the formula for total costs?
FC + VC or indirect costs + direct costs
What is the formula for unit cost?
Total cost/output
How does increased output cause economies of scale?
Higher the output the lower the unit cost as fixed costs are spread over more units.
What is marginal cost?
The change in variable cost of producing one extra unit
What are social costs?
costs to stakeholders or environment due to the product. e.g. cigarettes or fuel
What is an opportunity cost?
what a business could have spent money on
What is revenue?
The cash that flows into a business from sales
What is the formula for average revenue?
Total revenue/number of sales
How does level of costs affect a business decision making process?
A business needs to remain competitive whilst profiting to please stakeholders.
What is costing?
The financial measure of the effects of any business activity
How does costing benefit the business?
The business can plan for the future and maximise efficiency
How does reducing costs benefit a business?
Increases profit margins
How does competition affect a business’ costs?
Competitive markets have small profit margins
What is standard costing?
The cost a business expects for producing a product, or completing particular activity.
Why are standard costings set?
A business target. With any negative variance a solution can be found
What are the advantages of standard costing?
- Give a business a target cost
- Highlights problems
- Workers are more efficient to match costs
What are the disadvantages standard costing?
- Time-consuming process
- Quality may be sacrificed to match costs
- Cost will change
What is a cost centre?
A specific part of a business where costs can be identified and allocated
What ways can a cost centre be allocated?
The product being produced, Size or location
Size
What are advantages of cost centres?
- Shows departments performance
- Encourage efficiency
What are disadvantages of cost centres?
- Time consuming
- Difficult to separate departments
- Cost allocation may be unfair
What is a profit centre?
Profits are attributed to different parts of the business
Why are profit centres used?
Shows most profitable departments
What is a disadvantage of profit centres?
Departments can make profit indirectly e.g. marketing
What is absorption costing?
Indirect costs absorbed by cost centres
What is the main advantage of absorption costing?
Ensures overheads are covered by the business
