Flashcards in Chapter 28 (costs) Deck (11):
What are the costs of production?
What are Direct costs?
Direct costs are costs that can be clearly identified with each unit of production and can be allocated to a cost centre
What are Indirect costs?
Indirect costs are costs that cannot be clearly identified with each unit of production or allocated accurately to a cost centre
What are Fixed costs?
These costs do not vary with output in the short run, such as rent of premises.
What are Variable costs?
These costs vary with output, such as the direct cost of materials used in making a washing machine.
What are Marginal costs?
These costs are the extra cost of producing one more unit of output.
what is Break-even analysis?
The break-even point of production is the level of output at which total costs equal total revenue – neither a profit nor a loss is made
what is a Margin of safety
The margin of safety is the amount by which the sales level exceeds the break-even level of output
Break-even analysis – further uses
break-even techniques can also be used to assist managers in making key decisions.
-A marketing decision e.g. the impact of a price increase
-An operations-management decision e.g. the purchase of new equipment with lower variable costs
-Choosing between two locations for a new factory
what is the usefulness of break-even analysis?
-Charts are relatively easy to construct and interpret
-Analysis provides useful guidelines to management on break-even points, safety margins and profit/loss levels at different rates of output
-Comparisons can be made between different options by
constructing new charts to show changed circumstances.
-The equation produces a precise break-even result.
-Break-even analysis can be used to assist managers when taking important decisions, such as location decisions, whether to buy new equipment and which project to invest in.