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Chapter 18 - Costs - Coggle Diagram

- - - - Suppose a business has been taken to supply a batch of products at a price much lower than they would normally sell for
      - If the business were to use the full costing method, the order would be rejected because the total costs of producing the order will not be covered by the price that the consumer is wiling to pay
      - Using contribution costing, it is only the marginal cost of the order that needs to be considered, any revenue gained above the marginal cost, is a contribution to fixed costs and will profit after all costs are covered
    - - Considers the difference between the selling price and variable costs
      - A business might need to make a decision whether it could continue to manufacture all its products or wheter it would be more profitable to by them in form another business
      - If it continues to manufacture all its products, the business will be getting a contribution to the fixed costs if the price that it received for the product is higher than the variable costs of its manufacture
      - If it decided to stop production and buy products in from another manufacturer, this contribution to fixed costs would be lost, meaning there would be more to cover than previously
    - - The revenue from the sale of a product might not cover the full cost of production, but should a business to stop production of that item
      - A business might have other reasons, besides profitability, to continue production of a loss making product
      - The business would also be maximising the use of its production capacity in terms of labour and equipment
    - - Sometimes there is insufficient production capacity to produce the whole range of products that has been made by a business
      - A decision must be made about which product to stop producing
      - In such case, the business could calculate the contribution to fixed costs and profits made by each product by multiplying the predicted production by contribution per unit
      - The product with the lowest total contribution would no longer be required
    - - Contribution costing can be used when a penetration price is to be charged on products when entering a new market
      - In the longer term, the fixed costs must also be covered, but in the short term the business might only focus on covering all variable costs, like direct labour and materials
      - Once the product is established in the new market, the price can be raised so that all costs are covered in the long term
- - - - Businesses need to make sure that the price charge will cover all costs and provide some profit for the business
    - - Profit = Total revenue - Costs
      - Total revenue = Price x number sold
      - Total costs = Fixed costs + variable costs
      - Inaccurate costs information leads to prediction of a profit when there may not be one
      - Accurate costs information alerts a business to that fact it may be spending too much on particular activities
    - - A cash flow forecast is a prediction and therefore might be inaccurate
      - That possibility increases if the costs information isn't accurate
      - Leads a business to prepare for shortfall that might not happen
    - - The annual financial statements must be a true representation of its financial position, which cant happen with the wrong information
    - - It will be impossible to make accurate comparisons if one period was inaccurate
- - - - Before committing to the production of a product, businesses calculate the likelihood of a profit being made
      - In order of be profitable, the price that can be charged should be sufficient to cover all production costs and provide some profit
      - The total cost divided by output gives the average cost, which must be lower than the price to be charges if a profit is to be made
      - Total cost = Fixed costs + variable costs
      - Average cost = Total cost / Output
    - - Occasionally a business receives a one-off order for its products but at a lower price than usual
      - The order should be accepted if the extra cost of making the additional goods is lower than the price being offered
      - The business would take into account the additional materials costs, labour costs and transport costs
      - Fixed costs need not be part of the calculation if they are already covered by the orders from existing customers
    - - The relationship between costs and revenue determines whether or not a business continues to exist
      - Revenues mist cover costs for a business to survive
      - Businesses might also look at the trend of costs when making such a decision
- - - - Contribution per unit = Selling price per unit - Variable costs per unit
      - Breakeven output = Fixed costs / contribution per unit
    - - Total revenue = Price per unit x Quanitity sold
      - Total costs = Fixed costs + variable costs
      - Variable costs = variable costs per unit x quanitity produced)
    - - Give it a title
      - Lable the axis and lines
      - Label the breakeven point
      - Mark the level of output actually achieved
      - Mark the margin of safety (difference between achieved level of output, and breakeven level of output when the achieved level of output is higher than the breakeven level of output)
    - - Difference between breakeven level of output and current level of output