The breakeven point for an organisation is the point at which sales exactly match costs and is calculated as: Fixed cost
Advanced BC4560418 – PDF
Management Accounting: Costing FLASH CARDS
What are the three elements of cost and how are they categorised as direct or indirect?
The elements of cost are materials, labour and overheads. If a cost can be traced directly to a product it’s classified as a direct cost. Costs that cannot be traced directly to production are indirect costs. For example, a production worker’s wages are a direct labour cost, whereas an accounts assistant’s wages are an indirect labour cost.
What is margin of safety and how is it calculated?
The margin of safety is the difference between the level of activity at which an organisation breaks even and its planned level of activity, that is, its target sales. It measures the amount by which planned sales can fall before the business starts to make a loss. Margin of safety = Target sales - Breakeven sales Margin of safety percentage = (Target sales - Breakeven sales) ÷ Target sales x 100
How does activity based costing work?
Instead of recovering overhead costs on the basis of machine or labour hours, activity based costing (ABC) first allocates costs to the activity that’s the primary cause of the overhead, that is, the cost driver. The cost of each activity is then shared over the products that use the activity, based on the level of use.
How are the numbers of units required to generate a specific target profit calculated?
The breakeven point for an organisation is the point at which sales exactly match costs and is calculated as: Fixed costs ÷ Contribution per unit To calculate the unit sales required to generate a target profit, the target profit is added to the fixed costs and the total is divided by the contribution per unit: (Fixed costs + Target profit) ÷ Contribution per unit.
Cost classification.
Internal Rate of Return (IRR).
How do different costs behave?
What is it and how is it used?
Fixed costs – do not vary with production Variable costs – vary in direct proportion to the level of production
Semi-variable costs – include an element of both fixed and variable costs Stepped costs – are fixed up to a certain level then increase once that level has been exceeded
IRR is the discount factor at which the Net Present Value (NPV) of the cash flows of a project is zero. Organisations will often set a minimum required IRR for projects to achieve. If, when the cash flows of a project are discounted by the required IRR, this results in a positive NPV, the organisation will approve the project. For example, if a business has a minimum required IRR of 15%, the cash flows of a project would be discounted at 15%. If a positive NPV is achieved, the IRR must therefore be greater than 15% and the business can approve the project.
Overhead Recovery Rate (ORR)
Overhead Recovery Rate (ORR)
– machine hours
– labour hours
Overhead Recovery Rate per machine hour = Budgeted overhead cost ÷ Budgeted machine hours
Overhead Recovery Rate per labour hour = Budgeted overhead cost ÷ Budgeted labour hours
For every machine hour used on a product, job or service one hour of the ORR is added to the cost.
For every hour of labour worked on a product, job or service one hour of the ORR is added to the cost.
Overheads incurred and overheads recovered. What‘s the difference?
Overheads incurred are the actual amount an organisation has paid for its overheads. Overheads recovered are the total overheads that have been absorbed into the cost of a product, job or service using the overhead recovery rate (ORR).
What’s included in prime cost, marginal cost and full absorption costs?
Prime cost is the total of all direct costs of production: direct material and direct labour (and occasionally direct overheads). Marginal cost is the total of all variable costs: the prime cost plus variable production overheads. Full absorption costs are the total production cost: the marginal cost plus fixed production overheads. Note: non-manufacturing costs, like selling and administration overheads, are not included in production costs.
