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AS Costs

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3 views

AS Costs

cots

Uploaded by

wijdan.ali7869
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Costs

Why Cost Information Is Required

• Helps in calculating pro t and loss


• Helps in making informed pricing decisions — marketing department
• Allows comparisons to be made — pro tability of products
• Helps in setting up future budgets
• Helps the managers in allocating resources
• Helps in decision making — costs associated with producing by machine vs costs associated with labour intensive
production

Classi cation Of Costs

1) Direct Costs — costs which can be directly identi ed with one unit of output e.g raw materials required to produce
one unit — amount of meat purchased by a fast food restaurant make speci c amount of hamburgers

2) Indirect Costs — costs which cannot be directly identi ed with one unit of output — rent etc — promotional
expenditure of a super market

3) Fixed Costs — types of costs which do not change despite varying level of outputs — for e.g rent has to be paid
every month whether business makes 50 units or 70 units

4) Variable Costs — type of costs which depends on the level of outputs produced by a business — for e.g if 50 units
are to be produced, less raw material costs are there as compared to producing 70 units

5) Marginal Costs — cost required for producing extra units

Costs Centres Pro t Centres


• helps in comparison of
• classi cation of business • classi cation of pro ts earned
performance — helps to identify
costs in terms of: by business in terms of:
weak & strong areas
• products • each product within a multi
• helps in decision making —
• departments product rm
which pro t centres to open,
• speci c production stages • each branch within a chain of
which costs centres are
• etc shops
unnecessary
Overheads
• indirect expenses of a business Average Cost

• product overheads — factory rent total costs associated with production of a product

• administrative overhead — o ce no of units produced

rent
• nance overhead — instalments to
be paid on loan taken

Contribution Costing Technique


Full costing technique
• revenue from each unit contributes to xed costs
• Full costing allocates all costs to each product.

Stages
Stages
• units are produced and sold
1. Identify and add up all of the direct costs.
• variable costs are rst deducted from the revenue earned
2. Calculate the total overheads of the business for a
given time period. • remaining revenue contributes to the xed costs

3. Add the total direct costs & total overheads (overheads)

4. Calculate the average cost • pro t is only made after the overhead cost is covered

Uses
• relevant for single-product businesses
• ensures every cost is considered (direct & indirect)
• can be used to compare costs over di erent time
periods as long as allocation of indirect costs Pro t $0
(overhead) remains consistent
• good basis for pricing decisions in single - product
rms — cost plus pricing

Limitations
• inappropriate method of overhead allocation in case
Pro t 200,000
of more than one product can lead to inconsistencies
• will only be accurate if no of units planned are
produced — fall in output would increase product
cost (avg cost) • eliminates the problem of deciding which

• not exible — if you used full costing once, it is method is useful for allocating overhead costs

essential to allocate consistent overheads so that • useful in more than one product producing

year to year comparisons can be made business


Use Of Cost Information

1) Decisions on when to stop selling a product — contributional costing


•
Break Even Analysis

• Breakeven point where neither pro t is made nor loss — Total Revenue = Total Costs
• Below breakup event point business makes losses — Above it makes pro ts

• Margin Of Safety:
The amount by which current sales level exceeds the
break even point
Indicates how much sales could without the business
going into losses

Total Output - Breakeven Output x100


Breakeven Output

• Fixed Costs
• Total Costs : addition of xed and variable costs
• Revenue

• Break Even Point Output Level =

Fixed Costs
Contribution Per Unit

Bene ts - Uses Limitations


• Easy to construct & interpret • Assumption that costs and revenue is represented in
• Managers can re draw the graph — analyse/ straight line is unrealistic
forecast the e ect of change in costs or revenue • Not all costs can be classi ed between xed & variable
• Help in decision making • No allowance for inventory levels
• Clearly indicates margin of safety • Unlikely that xed costs remain unchanged throughout

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