WK8: Costs and BE analysis

Question 1

differences between financial accounting and management accounting?

Answer 1

Fin acc:
regulated, reporting analysing

Man acc:
Decision making, planning, control and specific to the needs of the organisation

Question 2

what is meant by contribution

Answer 2

the difference between the selling price of product and the variable costs incurred in producing that product

Question 3

what is meant by a semi-variable cost?

Answer 3

Costs that contain both a fixed and variable element. e.g. telephone charges may include fixed rental cost-plus a charge linked to telephone usage

Question 4

what is meant by a step -fixed costs

Answer 4

costs that will remain fixed as output increases until activity reaches a level where the costs have to increase sharply.

e.g. supervision costs where an additional supervisor is required once a certain level of output is exceed

Question 5

how is breakeven point calculated

Answer 5

Break-even (units) = fixed costs/contribution per unit

Question 6

how is the margin of safety calculated?

Answer 6

margin of safety (in units) = expected sales (units) - break-even point (units)

or as a percentage…

margin of safety in units / expected sales in units

Question 7

What is a relevant range? why is it important

Answer 7

BE chart is valid only over a range of output - known as relevant range.

After certain level of output is reached, FC will increase and unit VC and SR may alter

Question 8

what are the assumptions underlying BE- analysis? (4)

Answer 8

1. Costs can easily be divided into fixed and variable
2. VC vary in direct proportion to activity within relevant range
3. FC remain static over the relevant range
4. The unit selling price will remain constant throughout the relevant range

Assumptions not always realistic. e.g raw materials Unit cost may lower w/ increased output as quantity discount is received.

+ may be non-cost factors to consider - including availability of finance and implications for the workforce