Transcript Costs - MrB-business

Costs
Introducing the topic
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Cutting costs to increase profits.
Page 507
Answer all questions.
Cost
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Why should a business have accurate costing
data?
- To ensure you have accurate profit and loss
information to make informed decisions.
- So Marketing can formulate correct pricing
decisions and strategies.
- To ensure you keep costs under control,
avoid cost blowouts.
- Help setting budgets.
Costs of Production
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Allocating costs can be difficult at times
especially if you have more than one product.
These are the five main categories for cost
allocation.
- Direct Cost
- Indirect Cost
- Fixed Cost
- Variable Cost
- Marginal Cost
Direct Costs
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These costs can be clearly identified with
each unit of production and can be
allocated to a cost center.
What would be a direct cost of making a
Ham Burger?
- The Meat
Labor and materials are the most
common direct costs for a manufacturer.
Indirect Costs
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Costs that cannot be identified with a
unit of production or allocated to a cost
center.
These are normally considered
overheads.
What would be a indirect cost of a
supermarket?
•
Promotional Expenditure
Other Costs
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Costs can be classified as the following.
Fixed Costs – these cost remain fixed
regardless of the level of out put i.e. rent
Variable Costs – this vary as the out put
changes such as the electricity used to cook a
fast food meal. Remember some costs can
have a fixed and variable element i.e.
salesman's wages + commission.
Other Costs
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Marginal Cost – these are the additional
costs of producing one more unit of out
put.
Complete Activity 28.1 Q’s 1-4 page 509
Classifying Costs
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Activity 28.2 page 511 question 1 and 2
Classifying Costs
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This is difficult as sometimes a cost cannot
always be allocated to a category.
Wages will continue to be paid even if there is
a lack of orders, so they can no longer be
considered direct as they have become an
overhead.
Telephone charges could be allocated directly
to a product if accurate records were kept.
Break Even Analysis
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The level of output at which total costs
equal total revenue.
Can be done in two ways.
• Graphical
• The Equation method
• Includes (FC, VC, TC , S)
Cost and Sales Revenue ($)
THE BREAK EVEN CHART
Sales Revenue
Profit at full
capacity
Total Costs
Variable Costs
Fixed Costs
0
Break Even Point
Full Capacity
Units of output
and sales
Margin of Safety
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The amount at which sales level
exceeds the break even level of ouput.
So if your break even point is 200 units
and your company is producing 350
units currently your margin of safety is
150 units.
The Break Even Equation
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The equation is as follows:
Break even level of output = fixed cost
contribution per unit
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Contribution per unit = selling price less
variable cost per unit.
Work out the break even output on the
following FC $300,000 CPU $75?
= 4000 units to break even
Break Even Analysis
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Break even analysis is useful for many
business applications as it can assist not
only with understanding how much
product you need to make to survive, but
in other departmental decision making
as you can show the impact on a new
graph.
Activity 28.3
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Break Even Chart page 512.
Break even analysis
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Marketing decision – increasing the
price of your products, assuming sales
level stays the same your break even
point will become less.
Operations decision – Buying a new
equipment will lower variable costs.
BEA – usefulness
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Easy to construct
Provides info on Break even point, safety
margins and p + l levels at different
output points.
You can chart the impact of new
decisions.
Assist in making decisions.
Evaluation
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The assumption that all costs and
revenues are represented by straight
lines is unrealistic, also semi variable
costs make the technique more
complicated, and inventory levels are not
taken into account it is assumed that all
units are sold we know in practice this is
unrealistic.