Chapter 29- Costs

Question 1

What are the uses of cost data?

Answer 1

1- To calculate profit or loss
2- To compare business performance
3- To assist other departments in decision making
4- To assist managers in decision making
5- To set budgets for the future

Question 2

What are direct costs?

Answer 2

Costs that can be clearly identified and allocated to a department.

Question 3

What are indirect costs?

Answer 3

Costs that can’t be identified and allocated to a cost center.

Question 4

What are variable costs?

Answer 4

The costs that vary with the number of units being produced for eg. raw materials, direct labour etc

Question 5

what are fixed costs?

Answer 5

They are constant. They will have to be paid even if 0 units are produced for eg. rent.

Question 6

What are marginal costs?

Answer 6

The extra cost of producing one more unit of output.

Question 7

What is the break-even point of production?

Answer 7

The point where costs are equal to revenue. it means that business is making neither a profit or a loss.

Question 8

What is the margin of safety?

Answer 8

The amount by which sales level is more than break even level of units.

Question 9

Formula for margin of safety?

Answer 9

Actual units- break even units

Question 10

Formula of break even?

Answer 10

Fixed costs
———————–
contribution per unit

Question 11

What is contribution?

Answer 11

Selling price less variable costs.

Question 12

What are the advantages of break-even analysis?

Answer 12

• Charts are easy to make and analyse.
• The equation gives an EXACT figure.
• Can assist managers in making operations decisions, location decisions etc.
• Can assist the marketing department in making pricing decisions.

Question 13

What are the disadvantages of break-even analysis?

Answer 13

• Imprudent. It assumes that all units produced are sold.
• Not all costs are easily classified. makes it complicated.
• Straight lines are unrealistic.
• It is unlikely that fixed costs remain unchanged at all levels of production.