UNIT 5. Chapter 28: Costs Flashcards

1
Q

Uses of cost data? (5)

A
  • Aid ‘profit equations’, to calculate profits and losses
  • Aid profitable decision making
  • Aid other departments e.g marketing departments to make pricing decisions
  • To make comparisons from previous years
  • To forecast
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2
Q

What are the cost classifications? (4)

A
  • Direct cost
  • Indirect cost
  • Fixed cost
  • Variable cost
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3
Q

Def. Direct cost

A

• These cost can clearly identify with each unit of production
e.g one direct cost to business studies department is the salary of the business teacher.

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4
Q

Def. Indirect cost

A

• Costs that cannot be identified with a unit of production

e.g Indirect cost to a garage is the rent

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5
Q

Def. Fixed cost

A

Costs that do not vary with output in the short run. E.g. Rent

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6
Q

Def. Variable cost

A

Costs that vary with output. E.g Costs of raw materials.

Not all direct costs are variable costs. For example, if a hotel buys a new juicing machine for the bar department, this is a direct cost to that department - but the cost of the machine will not vary with the number of orange juices being served.

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7
Q

Def. Break even point of production

A

The level of output at which total costs equal total revenue - neither a profit nor a loss is made.

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8
Q

What are the two ways break even analysis can be undertaken?

A
  • The graphical method

* The equation method

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9
Q

What are the three lines of information break even chart shows?

A
  • Fixed costs
  • Total costs
  • Sales revenue

The chart on 25/2/16

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10
Q

Def. Margin of safety

A

The amount by which the sales level exceeds the break even level of output.

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11
Q

Equation for Total Cost, Total Revenue, Variable Cost, Break Even Quantity?

A

Total Cost = Fixed costs + Variable Costs
Total Revenue= Price x Quantity Sold
Variable Cost = Quantity Sold x Avg Variable Cost
Break Even Quantity = Fixed Cost / (Price - AVC)

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12
Q

Break Even analysis reliability?

A
  • Costs and revenues may not always be in a straight line. For example costs can be affected by the output production which may not be smooth.
  • Not all costs can be classified into fixed or variable.
  • It is unlikely that fixed costs will remain the same.
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