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

    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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    Introduction to Accounting and Finance Lecture 8 PDF

    Description

    This quiz covers key concepts from Lecture 8 of the Introduction to Accounting and Finance course, focusing on management accounting, cost accounting principles, and cost-volume-profit analysis. Participants will explore how these concepts aid in decision-making and cost management in business contexts.

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