Unit 2 - Cost concepts for cost-volume-profit analysis Flashcards
What is Cost-volume-profit-analysis? and why is it used?
CVP analysis is used by management to determine the profitability of producing a particular good or service. When producing a product, cost information is available per unit. When a business is providing a service, cost information is generally based on an hourly rate.
What are direct costs
Costs easily traced to an individual product such as wheels for a scooter
What are indirect costs?
Costs of production not directly linked to the product such a as depreciation of equipment used to put a scooter together
What are variable costs?
Linked to the level of production (increases when more is made). For example. Wages for production staff increase when more scooters must be produced.
What are fixed costs?
Costs that do not changed based on the level of production (as long as the business doesn’t not exceed the relevant range).
Example. Insurance or rent will remain unchanged even when production levels change.
What are semi-variable costs?
Have a fixed and variable component and are likely to increase when production increases.
Example. Internet costs will have a fixed monthly cost unless the maximum usage is exceeded where the cost becomes variable as additional costs are added.
What is the relevant range?
Identifies the maximum level of production that is available given the existing resources.
Example. A scooter company can produce a maximum of 20,000 scooters per year without the need for purchasing more equipment and machinery.
What is the contribution margin?
the difference between the selling price (sp) and the variable cost per item (vc). The margin is what remains to cover fixed costs and to generate a profit.
What is break-even?
Where total revenue is equal to total costs. No profit or loss is made.
What is the margin of safety?
The difference between the existing level of sales and the level of sales required for break-even
How do you calculate the contribution margin?
Contribution Margin = Selling Price - Variable costs
CM = sp - vc
How do you calculate the break-even?
Break-even = Fixed Costs divided by Contribution Margin
How do you calculate the margin of safety?
Margin of Safety = Current sales - Break even sales
How do you calculate the margin of safety as a percentage?
Margin of Safety divided by Existing Sales times 100 over 1 = ___ %
