Costs Flashcards

1
Q

Break-even point

A

The level output where total costs equal total revenue, where there is no profit or loss

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2
Q

Why do u need cost information

A

-Calculation of profit or loss
-Pricing decisions
-Measuring performance
-Setting budgets
-Resource use
-Making choices

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3
Q

Types of costs

A

-Direct costs- can be identified with each unit of production and can be allocated to a cost centre

-Indirect costs- cannot be identified with unit of production
or allocated to a cost centre

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4
Q

Fixed costs

A

Costs that do not vary with output

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5
Q

Variable costs

A

Costs that vary with output

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6
Q

Cost centres and Profit centres

A

The section of business, such as department that incurs the costs

The section of business where costs and revenue can be allocated for profit to be calculated

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7
Q

Benefits of using Profit and Cost centres

A

-Managers and employees have targets, improves motivation
-Individual performances of divisions could be compared
-Targets could be compared with actual performance to identify the weak aspects.
-Work can be monitored and decisions could be made

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8
Q

Full costing

A

Allocates all direct and indirect costs to products or services of a business.

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9
Q

Benefits of full costing

A

-Relevant for single product businesses so there is no uncertainty about share of overheads
-All costs are allocated
-Performance of different time periods could be assessed as long as the same method of allocating overheads is used

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10
Q

Limitations of full costing

A

-There is no attempt to allocate each overhead cost on basis of actual expenditure occurred
-Inappropriate methods of overhead cost allocation can lead to in consistensies
-It can be risky to use this cost method for making decisions
-It is essential to allocate overheads on the same basis

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11
Q

Contribution costing

A

Costing method that allocates only direct costs to cost centres and profit centres, not over head costs

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12
Q

Marginal cost

A

The additional cost of producing one more unit of output

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13
Q

Break-even analysis

A

Uses cost and revenue data to determine the break-even point of production

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14
Q

Margin of safety

A

The amount by which the current output level exceeds break-even level of output

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15
Q

Break-even level of output

A

Fixed costs
_____________________ X 100
Contribution per unit

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16
Q

Break-even analysis uses

A
  • Marketing decisions
    -Operations management decisions
    -Location decision
17
Q

Benefits of break-even

A

-Easy to construct and interpret
-Comparisons can be made
-Equation produces precise result
-Used by assistant managers for taking decisions

18
Q

Limitations of break-even

A

-The assumption that revenue and costs are straight lines
-All costs cannot be classified
-Unlikely fixed costs remain unchanged
-Break-even is based on forecasts