Introduction to Accounting and Finance - Lecture 8

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Questions and Answers

What is the formula to calculate break-even quantity?

  • q = FC / C per unit
  • q = C / (p - v)
  • q = (X + FC) / (p - v)
  • q = FC / (p - v) (correct)

The contribution per unit is calculated by subtracting the variable cost from the selling price.

True (A)

What is the contribution per unit given a unit selling price of £20 and a unit variable cost of £10?

£10

The margin of safety is calculated as expected sales minus ________ sales.

<p>break-even</p> Signup and view all the answers

Match the following terms with their respective definitions:

<p>Profit/volume ratio = Proportion of each £ of sales available for profit and fixed costs Margin of safety = Extent to which expected sales exceed break-even point Break-even point = Sales level at which total revenues equal total costs Target profit = Desired profit level to be achieved after covering costs</p> Signup and view all the answers

What is the formula for calculating profit in Cost-Volume-Profit (CVP) analysis?

<p>Total Revenue - Total Costs (C)</p> Signup and view all the answers

At the break-even point, total revenue equals total fixed costs.

<p>False (B)</p> Signup and view all the answers

What does the abbreviation FC stand for in CVP analysis?

<p>Fixed Costs</p> Signup and view all the answers

The break-even point occurs when profit equals ______.

<p>zero</p> Signup and view all the answers

Match the following components of CVP analysis with their definitions:

<p>p = Price per unit q = Quantity sold v = Variable cost per unit C = Total contribution margin</p> Signup and view all the answers

What do total variable costs depend on in CVP analysis?

<p>Quantity produced (B)</p> Signup and view all the answers

Total sales at the break-even point are greater than total costs.

<p>False (B)</p> Signup and view all the answers

What is the relationship between total sales and total costs at the break-even point?

<p>They are equal.</p> Signup and view all the answers

What are the two main components of semi-variable costs?

<p>Both fixed and variable components (C)</p> Signup and view all the answers

All costs can be classified as either fixed or variable without exception.

<p>False (B)</p> Signup and view all the answers

What does the break-even point represent in CVP analysis?

<p>The point where revenues cover all costs, resulting in zero profit.</p> Signup and view all the answers

Semi-fixed costs are fixed within specified activity levels but eventually increase or decrease by some constant amount at _____ activity levels.

<p>critical</p> Signup and view all the answers

Match the type of cost to its description.

<p>Fixed costs = Remain constant over wide ranges of activity Variable costs = Vary in direct proportion with activity Semi-variable costs = Include both a fixed and a variable component Semi-fixed costs = Fixed within specified activity levels, but change at critical levels</p> Signup and view all the answers

What does cost-volume-profit (CVP) analysis help determine?

<p>The break-even point (D)</p> Signup and view all the answers

Fixed costs remain constant regardless of the level of activity.

<p>True (A)</p> Signup and view all the answers

What is a cost object?

<p>A cost object is anything for which a separate measurement of cost is required.</p> Signup and view all the answers

Direct materials are an example of ______ costs in a manufacturing organization.

<p>variable</p> Signup and view all the answers

Match the following types of costs with their definitions:

<p>Variable Costs = Costs that change with the level of activity Fixed Costs = Costs that remain constant regardless of activity level Semi-Fixed Costs = Costs that may change with significant changes in activity Semi-Variable Costs = Costs that have both fixed and variable components</p> Signup and view all the answers

Which of the following is NOT considered a fixed cost?

<p>Payroll for production workers (B)</p> Signup and view all the answers

Semi-variable costs remain unchanged unless a specific threshold is crossed.

<p>False (B)</p> Signup and view all the answers

What is the primary focus of management accounting?

<p>The decision-making role and cost control.</p> Signup and view all the answers

What is the planned selling price per collar for Yorkies Ltd?

<p>£8 (C)</p> Signup and view all the answers

The break-even point for Yorkies Ltd is 40,000 units.

<p>False (B)</p> Signup and view all the answers

What is the total profit calculated for Yorkies Ltd?

<p>£35,000</p> Signup and view all the answers

The variable costs for Yorkies Ltd per unit is ______.

<p>£4.80</p> Signup and view all the answers

How many units represent the margin of safety for Yorkies Ltd?

<p>10,937 units (C)</p> Signup and view all the answers

Match the following costs with their descriptions:

<p>Direct materials = Cost of raw materials used Direct labour = Wages paid to workers directly involved Overheads = Indirect costs supporting production Fixed costs = Costs that do not change with production levels</p> Signup and view all the answers

Fixed costs for Yorkies Ltd total to £93,000 annually.

<p>True (A)</p> Signup and view all the answers

What is the mathematical formula for margin of safety?

<p>Planned sales – break-even sales</p> Signup and view all the answers

Flashcards

Semi-fixed Costs

Costs that remain constant over a wide range of activity levels, but increase or decrease by a set amount at critical activity levels.

Variable Costs

Costs that vary directly with the level of activity. Example: Direct materials, direct labor.

Fixed Costs

Costs that remain constant regardless of activity level within a relevant range. Example: Rent, salaries.

Semi-variable Costs

Costs that contain both a fixed and a variable component. Example: Telephone expenses (line rental is fixed, calls are variable).

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Cost-Volume-Profit (CVP) Analysis

A tool that helps in analyzing the relationship between changes in activity, costs, and profit. It allows for break-even analysis.

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Cost Object

Anything for which a separate measurement of cost is needed, such as a product, service, or activity.

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Break-Even Point

The point where total revenue exactly covers total costs. The business neither makes a profit nor incurs a loss.

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Cost Accounting

The analysis of costs to identify and measure the cost of a product, service, or business center. It helps with pricing and decision-making.

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Full Costing

Process of calculating the costs associated with producing or providing a product or service. Includes direct materials, direct labor, and overhead costs.

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Profit

Total revenue minus total costs. It represents the amount of money left over after all expenses are paid.

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Total Contribution (C)

The difference between total revenue and total variable costs. It represents the amount of money available to cover fixed costs and generate profit.

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Fixed Costs (FC)

Costs that remain constant regardless of the level of activity within a relevant range. Examples: rent, salaries.

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Price per Unit (p)

The price per unit of a product or service.

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Quantity (q)

The quantity of products or services produced or sold.

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Break-Even Quantity

The break-even quantity refers to the number of units that need to be sold to reach the break-even point. It's calculated by dividing fixed costs by the contribution per unit.

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Contribution Margin

The contribution margin represents the amount of revenue remaining after deducting variable costs. It contributes to covering fixed costs and generating profit.

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Profit-Volume Ratio (P/V Ratio)

The profit-volume ratio (P/V ratio) measures the proportion of each sales dollar that contributes to covering fixed costs and generating profit. It's expressed as a percentage.

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Margin of Safety

The margin of safety represents the difference between actual or expected sales and the break-even point. A higher margin of safety indicates a greater buffer against losses.

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What is the break-even point?

The break-even point is the level of sales where total revenue equals total costs. This means the business neither makes a profit nor incurs a loss.

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What is Margin of Safety?

Margin of safety is measured as the difference between actual or planned sales and the break-even sales. It represents the amount by which sales can fall before a loss is incurred.

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What is Contribution Margin per Unit?

Contribution margin per unit is the amount of money that each unit sold contributes towards covering fixed costs and generating profit. This is calculated by subtracting variable cost per unit from the selling price.

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What is CVP Analysis?

CVP analysis examines the relationship between sales volume, costs, and profit. It is used to predict profits at different sales levels and make decisions about pricing, production, and sales targets.

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What are Fixed Costs?

Fixed costs remain constant regardless of the activity level within a relevant range. Examples include rent, salaries, and insurance.

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What are Variable Costs?

Variable costs change directly with the activity level. Examples include direct materials, direct labor, and sales commissions.

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What is Cost Accounting?

Cost accounting involves analyzing costs to measure the cost of products, services, or activities. Key aspects include classifying and assigning costs to different objects.

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Study Notes

Introduction to Accounting and Finance - Lecture 8

  • The lecture focuses on management accounting's role in decision-making and cost management as a key control lever.
  • Lecture 8 covers cost accounting concepts and cost-volume-profit (CVP) analysis. CVP analysis determines the break-even point, where revenue equals total costs.
  • Lecture 9 focuses on full costing, calculating costs for products, services, or business units, and its effects on pricing.
  • Lecture 10 looks at examples of decisions based on costs and models for production decisions with limited resources.

Cost Objects

  • A cost object (or cost unit) is anything (product, service, activity) for which a separate cost measurement is necessary.

Classification by Cost Behaviour

  • Understanding how costs and revenues change with activity levels is crucial for many decisions.
  • Cost types:
    • Variable costs: change in direct proportion to activity levels.
    • Fixed costs: remain constant over a wide range of activity levels.
    • Semi-fixed costs: fixed within certain activity levels but change by fixed amounts at critical activity levels.
    • Semi-variable costs: have both a fixed and a variable component (e.g., telephone charges).

Variable Costs

  • Examples in manufacturing: direct materials, machine energy.
  • Examples in merchandising: purchase cost of sold items.
  • Graphically, total variable cost increases linearly with output, while unit variable cost remains constant.

Fixed Costs

  • Examples: non-current asset depreciation, insurance, supervisory salaries.
  • Graphically, total fixed cost remains constant with output and unit fixed cost decreases with increasing output.

Semi-Fixed Costs

  • Examples include: depreciation of non-current assets needing replacement, insurance contracts renegotiation, and managerial salary changes due to new hires.
  • Graphically, total cost displays stepwise increases/decreases with output (discontinuous graph).

Semi-Variable Costs

  • Example: landline phone bills (fixed rental; variable calls).
  • Graphically, total cost increases gradually with output, a linear relationship with a non-zero y intercept.

Cost-Volume-Profit (CVP) Analysis

  • Examines the relationship among changes in sales volume, costs, and profits.
  • Enables break-even analysis; determining the volume where revenues equal costs.

CVP Analysis: Key Assumptions

  • Costs can be categorized into fixed and variable elements.
  • Unit variable costs and selling prices remain constant per unit.
  • All other factors (e.g., sales mix, production efficiency, methods) remain constant. These assumptions hold true in the short run over a relevant output range.

CVP Analysis Summary

  • Variable costs vary directly with activity.
  • Fixed costs remain constant across wide activity ranges.
  • Semi-fixed costs remain fixed within activity levels but change at critical activity levels.
  • Semi-variable costs consist of both fixed and variable components.
  • Cost classification depends on the time period considered- in the short run, costs may be fixed, while in the long run they will change.

How to Calculate Break-Even Point (BEP)

  • [Break-even Point (Units)] = Fixed Costs / Contribution Per Unit
  • Contribution Per Unit = Selling Price Per Unit - Variable Cost Per Unit

How to Calculate Target Profit Production

  • [Target Profit Production (Units)] = (Fixed Costs + Target Profit) / Contribution Per Unit

Other CVP Points

  • Profit/volume ratio: the proportion of sales available to cover fixed costs and yield profit.
  • Margin of safety: the extent to which actual sales exceed the break-even point.
  • Percentage margin of safety: percentage deviation between expected sales and break-even point.

Student Activity Example (Yorkies Ltd)

  • Calculates break-even point, margin of safety, and profit for a hypothetical dog collar manufacturer (Yorkies Ltd). Given the following data:
    • Planned selling price: £8
    • Planned output/sales: 40,000 units
    • Fixed costs, production: £65,000
    • Fixed costs, selling: £28,000
    • Variable costs per unit: direct materials £3.00, direct labor £1.10, overheads £0.70.

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