Accounting
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Accounting. Costs, Profit, Contribution and break Even Analysis. Content. Costs Fixed / variable Direct / indirect Revenue Profit Contribution Break Even Analysis. Costs. Fixed costs – these do not alter with output Variable costs – alter directly with the business’s level of output

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Accounting l.jpg

Accounting

Costs, Profit, Contribution and break Even Analysis


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Content

  • Costs

    • Fixed / variable

    • Direct / indirect

  • Revenue

  • Profit

  • Contribution

  • Break Even Analysis


Costs l.jpg
Costs

  • Fixed costs – these do not alter with output

  • Variable costs – alter directly with the business’s level of output

  • Total costs – are fixed and variable costs added together

  • Semi variable – have a fixed and a variable element


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Fixed Costs

  • Examples – rent, management salaries, rates

  • Graphically fixed costs will always be illustrated by a horizontal line

  • As output changes fixed costs stay the same


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Variable costs

  • Examples – fuel, raw materials

  • Graphically variable costs will always be a diagonal line from the origin

  • As output changes variable alter directly



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Direct / Indirect Costs

  • Direct – are attributed to the production of a particular product and vary directly with output e.g direct materials and labour

  • Indirect – Cant be allocated to the production of a specific product and relate to the business as a whole e.g. indirect labour costs, administration


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Why do businesses calculate costs of production?

  • For forecasting and budgeting

  • To set prices so they make a profit

  • To work out if they can make a profit


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Revenue

  • Revenue = Quantity Sold x Average Selling Price

  • Generally if it reduces its selling price you expect to sell more

  • A rise in price usually leads to a fall in quantity sold


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Profits

  • Profit = Total Revenue – Total Costs

  • Profit depends on:

    • Profit margins – the amount or % of the final selling price that is profit

    • Quantity or volume sold

    • Total costs

  • Profit is the main objective of firms in the private sector


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Contribution

  • Contribution is the total revenue – variable costs

  • It measures how much is being contributed the fixed costs by the units that have been sold

  • Contribution per unit = Selling price per unit – Variable cost per unit


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Break even Analysis

  • A business breaks even if it does not make a profit or a loss

  • It is the point at which the business makes just enough revenue to cover their costs.

  • In other words profit = 0

  • Businesses must make a profit to survive.

  • To make a profit, revenue must be higher than costs.


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Break even methods

  • Break even analysis can use a number of methods:

    • Contribution method

    • Break even chart

    • Break even graph


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The Contribution Method

This involves a two part calculation:

  • Selling Price per unit – variable cost per unit = contribution (towards fixed costs).

    AND

  • Fixed costs divided by contribution = Break even point.



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Profit or Loss

LOSS

TC > TR


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Summary

  • Costs can be classified into fixed (don’t change with output) and variable (change with output)

  • Direct costs are costs directly related to the costs of producing an item, indirect costs are not directly related

  • Revenue – sales revenue x quantity

  • Profit = Total costs – Total revenue

  • Profit is the number one objective of most firms in the private sector

  • Contribution – Selling price – variable cost, it looks at how much each unit is contributing to fixed costs

  • Break Even Analysis – where a business makes neither a profit or a loss

  • Break even equation = Fixed costs / contribution per unit


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