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Microeconomic techniques:
What is meant by cost? Different costs and cost analysis.
Cost-volume profit, flexible budgeting and cost variances.
By Shan Wikoon
According to the official terminology of CIMA (2005), it
defined Costing as the technique and process of
ascertaining cost. These costing techniques comprise
principles and rules to ascertain cost of products or
services.
The paper goods that were purchased had a cost of 500, and only 400 of the
paper items were used at today's event. The remaining 100 were put in your
company's storeroom for use at the events to be catered in the next few weeks.
In this example, the cost of 500 consisted of a 400 expense and a 100 asset.
Cost Classification And Cost Behaviour
Variable costs and fixed
costs.
Variable costs
Variable costs are corporate expenses
that vary in direct proportion to the
quantity of output. Variable costs are a
direct function of production volume,
rising whenever production expands and
falling whenever it contracts.
Fixed costs are costs that do not change For example, let's assume it costs Company
XYZ $1,000,000 to produce 1,000,000
when the quantity of output changes. Unlike widgets per year ($1 per widget).
variable costs, which change with the amount
of output, fixed costs are not zero when This $1,000,000 cost includes $500,000 of
administrative, insurance, and marketing
production is zero. expenses, which are generally fixed.
Fixed costs can create economies of scale, If Company XYZ decides to produce
2,000,000 widgets next year, its total
which are reductions in per-unit costs through production costs may only rise to
an increase in production volume. This idea is $1,500,000 ($0.75 per widget) because it
also referred to as diminishing marginal cost. can spread its fixed costs over more units.
Fixed,
Variable,
Mixed, and
Step Costs
Cost-volume-profit
Cost-volume-profit (CVP) analysis is used to determine how changes in costs
and volume affect a company's operating income and net income. In performing
this analysis, there are several assumptions made, including:
Sales price per unit is constant.
Variable costs per unit are constant.
Total fixed costs are constant.
Everything produced is sold.
Costs are only affected because activity changes.
If a company sells more than one product, they are sold in the same mix.
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/cost-volume-profit-relationsh
ips/cost-volume-profit-analysis
Cost - volume - profit
24 500 10
24 1000 50
35 500 5
68 500 1
Cost-volume profit
one watch sell 10
Selling watches with
one watch cost 3 Only variable cost
fixed cost 0 No fixed cost
http://www.accountingtools.com/flexible-budget
End.
Shan is an experienced HND tutor and assessor who works in London, UK. He has a Degree of Master
of Laws in Law of International Trade - University of Wales, a - Diploma in Business Administration, a
Degree of Bachelor of Law and a Diploma in Computing.
If your institution is in London and seeking reliable tutors, please contact Shan on
shanwikoon@gmail.com