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What is a stepped cost?
Fixed costs that remain constant within certain limits but increase when those limits are exceeded, such as supervisor salaries when a new production shift is added.
What is the purpose of costing?
To provide information for pricing decisions, calculate profitability, and control expenditure.
What is a cost unit?
A cost that has both fixed and variable components, such as a telephone bill which includes a fixed monthly fee plus usage charges.
What are the four types of inventory valuation units?
A unit of production (e.g., a car), a unit of service (e.g., transport), a job for a specific client (e.g., a lawyer), and a production batch (e.g., 300 paper clips).
What are direct costs?
Costs that can be directly traced to the production of a specific product or service, such as materials and labor for manufacturing chocolates.
What does FIFO stand for and what does it entail?
FIFO stands for First In, First Out, where the oldest inventory items are sold first.
What are the advantages of using FIFO?
Closing inventory is valued at current prices, inventory valuations are based on actual prices paid, and it logically uses older stock first.
What are the disadvantages of FIFO?
It can inflate profits during rising prices and may lead to unreliable job quotations due to different costs for identical items from different batches.
What are indirect costs?
Costs that support production but cannot be directly linked to a specific product, such as cleaning supplies, managerial salaries, and overhead costs.
What is a variable cost?
A cost that changes directly with output levels, such as raw materials and direct labor.
What is a fixed cost?
A cost that remains unchanged within a certain level of activity or output, such as rent.
What is AVCO and its advantages?
AVCO stands for Average Cost, which reduces cash tied up in inventory and lowers storage costs.
What are the disadvantages of AVCO?
Delays from suppliers can halt production, and it is harder to manage during supply chain disruptions.
What is piece rate?
A wage rate paid to workers based on the number of units produced.
What is overtime payment?
Extra pay to an employee for working beyond contracted hours.
What is a bonus payment?
An additional payment to an employee for producing goods more quickly than the time allowed.
What is the overtime premium?
An extra percentage paid to employees on top of their regular wages for overtime work.
What is absorption costing?
A method of allocating overheads to cost units to determine the total cost per unit.
What is the rule for valuing inventory?
Inventory should be valued at the lower of cost and net realizable value.
What does net realizable value refer to?
The selling price less any costs to restore an asset to a salable condition.
What is Just In Time (JIT) inventory system?
A system where supplies are received exactly when needed in the production process, minimizing storage needs.
What is job costing?
A costing method that calculates the cost of meeting a specific customer order or job.
What are the two main types of cost centres?
Production Cost Centres, which are directly involved in producing goods, and Service Cost Centres, which provide services for production cost centres.
What is marginal costing?
The cost of producing one additional unit of output, where only variable costs increase while fixed costs remain unchanged.
What is under-absorption?
A situation where the overhead costs allocated to a cost unit are less than the actual overhead costs incurred.
What is marginal cost?
Marginal cost is the variable cost per unit of production.
What does contribution represent in cost analysis?
Contribution is the amount each unit of production contributes to covering fixed costs and generating profit, calculated as Selling Price - Variable Cost.
How is the Contribution/Sales Ratio calculated?
Contribution/Sales Ratio = (Contribution / Sales) x 100.
What is the break-even point?
The break-even point is the level of sales at which total revenue equals total costs.
What is the formula for calculating break-even in units?
Break-even in units = Fixed Cost / Contribution per unit.
What is the Margin of Safety?
Margin of Safety is the amount by which sales can fall before the business starts making a loss, calculated as Sales Quantity - Break-even Quantity.
What is the target profit output level formula?
Target profit output level = (Fixed Cost + Target Profit) / Contribution per unit.
What are the benefits of marginal costing?
Benefits include assessing spare capacity, workforce retention, new product promotion, clearing old inventory, future business potential, and impact on existing customers.
What factors should be considered when accepting a special order?
Factors include the contribution margin, impact on regular customers, and whether it utilizes spare capacity.
What does a limiting factor refer to in production?
A limiting factor is any constraint that restricts a business from producing more, such as shortages of materials, labor, or demand.
What should be done if a business unit or product is not making a positive contribution?
It should be closed if it is not covering fixed costs, considering the impact on related sales and potential cost savings.
How does marginal costing differ from absorption costing?
Marginal costing values inventory at variable costs only, while absorption costing values inventory at total costs (variable + fixed costs).
What is a break-even chart used for?
A break-even chart aids in short-term decision-making by helping businesses determine pricing, production levels, and cost management strategies.
What limitations exist for break-even and profit/volume charts?
Limitations include assumptions of constant variable costs, potential changes in fixed costs, and the complexity of preparing the charts.
What is the significance of the contribution per unit in decision-making?
It helps prioritize products when resources are limited, maximizing profit by focusing on the highest contribution per scarce resource.
What should a manufacturer consider when deciding to make or buy goods?
Consider the marginal cost of production versus the supplier's price, quality, reliability, and potential workforce implications.
What is the impact of accepting a special order at a lower selling price?
It can be acceptable if there is a positive contribution, meaning revenue covers variable costs.
What is the formula for calculating break-even in sales?
Break-even in sales = Fixed Cost / Contribution/Sales Ratio.
What is the role of contribution in pricing decisions?
Contribution helps determine the selling price needed to cover fixed costs and achieve profitability.
Why is marginal costing best suited for businesses with a single product?
It simplifies cost allocation, making it easier to calculate the break-even point without the complexity of multiple products.
What is the importance of the profit/volume chart?
It provides a visual representation of profit, loss, and break-even points, aiding financial analysis.
What is the effect of over-absorption in production?
Over-absorption occurs when too much overhead has been charged to production, affecting cost calculations.
What is the relationship between actual expenditure and budgeted expenditure?
An actual expenditure higher than budgeted indicates a potential issue in cost management or production efficiency.
How does the contribution margin affect profitability at different sales levels?
It shows the percentage of each dollar of sales that contributes to covering fixed costs and profit, impacting overall profitability.