Cost behaviour and break-even analysis

  • Created by: josief95
  • Created on: 13-12-15 13:37
Historic cost
Cost already incurred
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Opportunity cost
Value of an opportunity that has passed or been missed
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Relevant cost examples:
Opportunity cost & Differential future cost
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Irrelevant cost examples:
Sunk / Expired / Historic cost; a cost that doesn't require the decision of management
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Minimum price a business should charge for a lorry (£10,000) fitted with new engine (£2500) which could be sold immediately for (£9,000)
Opportunity cost + Engine cost
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Min. price for sale if product no longer used anyway?
Re-sale value £12
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Fixed cost
Remain constant (fixed) when changes occur to the volume of activity
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Variable Cost
Vary according to the volume of activity
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Semi-Variable Cost or Semi-Fixed Cost
It is a mixture of fixed and variable cost
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Total Cost =
Fixed Cost + Variable Cost
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Break-even point (BEP):
It is the level of (output) at which total cost is equal total revenue.
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Break-even point (BEP):
Fixed cost / Contribution per unit (Contribution per unit = Sales revenue per unit − Variable costs per unit)
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Units to produce and sell to achieve a Target Profit
Fixed cost + Target Profit / Contribution per unit
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Margin of Safety:
It is the excess of planned volume (sales revenue) of activity over volume (sale revenue) at Break-even Point
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Margin of Safety in units of output
Planned Sales (units) – Break-even Point (units)
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Margin of Safety in percentage
Planned Sales (units) – Break-even Point (units) x 100 / Planned Sales (units)
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Weaknesses of break-even analysis:
Non-linear relationships, Stepped fixed costs, Multi-product businesses
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BEP = [Total sales revenue =
Total cost]
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Contribution margin ratio =
contribution / sales revenue x 100%
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Other cards in this set

Card 2

Front

Opportunity cost

Back

Value of an opportunity that has passed or been missed

Card 3

Front

Relevant cost examples:

Back

Preview of the front of card 3

Card 4

Front

Irrelevant cost examples:

Back

Preview of the front of card 4

Card 5

Front

Minimum price a business should charge for a lorry (£10,000) fitted with new engine (£2500) which could be sold immediately for (£9,000)

Back

Preview of the front of card 5
View more cards

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