Cost behaviour and break-even analysis 5.0 / 5 based on 1 rating ? AccountingCost behaviour and break-even analysisUniversityAll boards Created by: josief95Created on: 13-12-15 13:37 Historic cost Cost already incurred 1 of 19 Opportunity cost Value of an opportunity that has passed or been missed 2 of 19 Relevant cost examples: Opportunity cost & Differential future cost 3 of 19 Irrelevant cost examples: Sunk / Expired / Historic cost; a cost that doesn't require the decision of management 4 of 19 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 5 of 19 Min. price for sale if product no longer used anyway? Re-sale value £12 6 of 19 Fixed cost Remain constant (fixed) when changes occur to the volume of activity 7 of 19 Variable Cost Vary according to the volume of activity 8 of 19 Semi-Variable Cost or Semi-Fixed Cost It is a mixture of fixed and variable cost 9 of 19 Total Cost = Fixed Cost + Variable Cost 10 of 19 Break-even point (BEP): It is the level of (output) at which total cost is equal total revenue. 11 of 19 Break-even point (BEP): Fixed cost / Contribution per unit (Contribution per unit = Sales revenue per unit − Variable costs per unit) 12 of 19 Units to produce and sell to achieve a Target Profit Fixed cost + Target Profit / Contribution per unit 13 of 19 Margin of Safety: It is the excess of planned volume (sales revenue) of activity over volume (sale revenue) at Break-even Point 14 of 19 Margin of Safety in units of output Planned Sales (units) – Break-even Point (units) 15 of 19 Margin of Safety in percentage Planned Sales (units) – Break-even Point (units) x 100 / Planned Sales (units) 16 of 19 Weaknesses of break-even analysis: Non-linear relationships, Stepped fixed costs, Multi-product businesses 17 of 19 BEP = [Total sales revenue = Total cost] 18 of 19 Contribution margin ratio = contribution / sales revenue x 100% 19 of 19
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