Costs Flashcards
Break-even point
The level output where total costs equal total revenue, where there is no profit or loss
Why do u need cost information
-Calculation of profit or loss
-Pricing decisions
-Measuring performance
-Setting budgets
-Resource use
-Making choices
Types of costs
-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
Fixed costs
Costs that do not vary with output
Variable costs
Costs that vary with output
Cost centres and Profit centres
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
Benefits of using Profit and Cost centres
-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
Full costing
Allocates all direct and indirect costs to products or services of a business.
Benefits of full costing
-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
Limitations of full costing
-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
Contribution costing
Costing method that allocates only direct costs to cost centres and profit centres, not over head costs
Marginal cost
The additional cost of producing one more unit of output
Break-even analysis
Uses cost and revenue data to determine the break-even point of production
Margin of safety
The amount by which the current output level exceeds break-even level of output
Break-even level of output
Fixed costs
_____________________ X 100
Contribution per unit
