3.2 & 3.3

Question 1

Direct Costs

Answer 1

Costs that can be clearly identified with each unit of production and can be allocated to a cost centre.

Question 2

Indirect Costs

Answer 2

Costs which cannot be identified with a unit of production or allocated accurately to a cost centre (also known as overhead costs):
- Purchase of a tractor for a farm
- Cost of cleaning a school

Question 3

Fixed Costs

Answer 3

Do not vary with output or sales.
Rent, wages

Question 4

Variable Costs

Answer 4

Vary with output or sales.
Electricity
Materials

Question 5

Revenue

Answer 5

The income received from the sale of a product. Shows the money earned from selling a product, costs have not been deducted.
Total Revenue = Price x Quantity

Question 6

Revenue Streams

Answer 6

Income an organisation gets from a parricular activity.

Question 7

Break-even

Answer 7

The level of output at which total costs equal total revenue. At the break-even point, proft is zero. No profit or loss is made.
BEP = fixed costs / contribution per unit

Question 8

Profit

Answer 8

A financial gain, the positive difference between the amount earned and the amount spent in buying, operating, or producing something.

Question 9

Margin of Safety

Answer 9

Amount by which the output level exceeds the break-even level of output. Useful indication of how much sales can fall without the business going into loss.

Question 10

Contribution

Answer 10

Fixed costs have to be paid no matter how much is being sold. Accountants need to know how much each unit sold contributes to paying off the fixed costs.

Question 11

Contribution per Unit

Answer 11

The amount each unit of production contributes towards the fixed costs and profit of th ebusiness.

The amount each unit of production contributes towards the fixed costs and profit of the business.
Contribution per unit = selling price per unit - variable cost per unit

Question 12

Target Profit

Answer 12

Target Profit level of Output = (Fixed Costs + Target Profit) / Contribution per Unit

Question 13

Breakeven Revenue

Answer 13

Amount of revenue needed to cover both fixed and variable costs of the business breakeven.
Breakeven Revenue = Fixed costs / (1 - direct costs/price)

Question 14

Target Price

Answer 14

Breakeven Target Price = (Fixed costs / Production level) + direct costs

Question 15

Usefulness of Breakeven

Answer 15

• Predict how many units must be sold to cover costs and establish if its a viable idea
• Show the bank or investors
• Easy to construct and interpret
• Assist managers in making important decisions
• Comparisons between different oprions can be made

Question 16

Limitations of Breakeven

Answer 16

• It is unrealistic to assume that costs and revenues will always be in a straight line
• Not all costs can be classified into fixed and direct
• Costs and price are estimated, actual data may vary