5.28 Costs Flashcards Preview

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Flashcards in 5.28 Costs Deck (12)
1

Direct costs

Can be clearly identified with each unit of productio and can be allocated to a cost centre

2

Indirect cost

Costs that cannot be identified with a unit of production or allocated accuratly to a cost tre

3

Break even point of production

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

4

Margin of safety

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

5

Contribution per unit

Selling price less variable costs per unit

6

Fixed costs

Costs that do not vary with output in the short run

7

Variable costs

Costs that vary with output

8

Marignal costs

The extrea cost of producing one more unit of output

9

Uses of cost data

+ Key factor in the "profit equation"
+ Important to other departments. e.g: Marketing for pricing methods
+ Allows comparison to be made with past periods of time --> measure efficiency and profitability
+ Set budget for the future
+ Comparing cost data to make decisions about resource use
+ Costs of different options help managers ti make decision and improve business performance

10

Break even analysis - further uses

1. Marketing decisions - the impact of price increase
2. Operation-management decision - the purchase of new equipment with lower variable costs
3. Choosing bw 2 locations
4. Point of profitability

11

+ of break even

+ Charts are easy to construct and interpret
+ Analysis provides useful guidelines to management on BE points, safety margin....
+ Comparisons can be made bw different options
+ Equation produces a precise results
+ Assist manager when taking important decisions

12

- of break even

+ Assumption that costs and revenues are presents in straight line --> unrealistic e.g: labour costs increases with output bc they have to work overtime
+ Not all costs can be classified into fixed and variable costs --> semi-variable costs
+ Assumption that all inventories will be sold --> unrealistic
+ Unlikely that fixed costs remain unchanged up to maximum capacity