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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
What is meant by cost?
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
when the quantity of output changes. Unlike 1,000,000 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
production is zero. administrative, insurance, and marketing
expenses, which are generally fixed.
Fixed costs can create economies of scale, If Company XYZ decides to produce
which are reductions in per-unit costs through 2,000,000 widgets next year, its total
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.
Some examples of fixed costs include rent, Although Company XYZ's total costs
increase from $1,000,000 to $1,500,000,
insurance premiums, or loan payments. each widget becomes less expensive to
produce and therefore more profitable.
Fixed Costs
Total
Total variable
variable costs
costs change
change
when
whenactivity
activitychanges.
changes.
Total
Total fixed
fixedcosts
costs remain
remain
unchanged
unchangedwhen whenactivity
activity
changes.
changes.
Cost Classifications for Predicting Cost
Behavior
Cost
Behavior:
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
Selling watches with
one watch sell 10 Only variable cost
No fixed cost
sales
one
amount
1
watch
cost per unit income
3 10
Profit
7
cost
2 6 20 14 3
3 9 30 21
4 12 40 28
5 15 50 35
fixed cost
6 18 60 42 0
7 21 70 49
8 24 80 56
9 27 90 63
10 30 100 70
11 33 110 77
12 36 120 84
13 39 130 91
14 42 140 98
15 45 150 105
Selling watches with
one watch sell 10 variable cost + fixed cost
fixed
cost sales
nt
one watch
amou variabl fixed
e cost cost
per
unit
total
cost
incom
e Profit
1 cost 3 100 100 103 10 -93 3
2 6 100 50 56 20 -36
3 9 100 33 42 30 -12
4 12 100 25 37 40 3
5 fixed cost
15 100 20 35 50 15 100
6 18 100 17 35 60 25
7 21 100 14 35 70 35
8 24 100 13 37 80 44
9 27 100 11 38 90 52
10 30 100 10 40 100 60
11 33 100 9 42 110 68
12 36 100 8 44 120 76
13 39 100 8 47 130 83
14 42 100 7 49 140 91
15 45 100 7 52 150 98
flexible budgeting and cost variances
What is a flexible budget?
A flexible budget is a budget that shows
differing levels of revenue and expense,
based on the amount of sales activity that
actually occurs. Typically, actual revenues
or actual units sold are inserted into a
flexible budget model, and budgeted
expense levels are automatically generated
by the model, based on formulas that are
set at a percentage of sales.
flexible budgeting and cost variances
Cost variance?
A flexible budget variance is any difference
between the results generated by a flexible budget
model and actual results. If actual revenues are
inserted into a flexible budget model, this means
that any variance will arise between budgeted and
actual expenses, not revenues.
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