Apr 14, 2016
- Complete the sentences below. Use the key words if necessary.
- Direct and indirect costs
key words
involves calculating the costs of different products or services, so that company managers can know what price to charge for particular products and services and which are the most . — those that can be directly related to the production of particular units of a product — are quite easy to calculate. Examples include manufacturing materials and manufacturing wages. But there are also or — costs and expenses that cannot be identified with particular manufacturing processes or units of production. Examples include rent or property taxes for the company’s offices and factories, electricity for lighting and heating, the maintenance department, the factory canteen or restaurant, managers’ salaries, and so on. Costs such as these are often grouped together on the profit and loss account or income statement as Selling, General and Administrative Expenses. - Fixed and variable costs
key words
Companies also differentiate between fixed costs and variable costs. are those that do not change in the short term, even if the production level changes, such as rent and interest payments. are those that change in proportion to the volume of production, such as components and raw materials, and overtime payments.
Manufacturing companies have to find a way of fixed and variable costs to the various products they make: that is, they divide up the costs and charge them to the different products. attempts to charge all direct costs and all production costs, and sometimes all indirect costs such as administrative expenses, to each of the company’s products or services. , calculates all the costs connected with a particular activity (e.g. product design, manufacturing, distribution, customer service), even if they are carried out by different departments in the company. Most companies have departments or functions that do not generate any profit but only incur costs (e.g. accounting and legal departments). For accounting purposes, companies often make these departments into , and allocate or charge all the costs related to them separately.
Breakeven analysis
key words
When deciding whether it would be profitable to produce a product, or offer a service, companies do a . This compares expected sales of the new product with expected costs — both direct and indirect — at various production levels. The is the — the number of units sold — at which the company — pays all its expenses. To make a profit, it is necessary to sell more than this.
Although cost accounting allows companies to calculate production costs, pricing decisions also depend on:
the level of demand
the prices of competitors’ products
the company’s financial situation
the company’s – the goals or aims it wants to accomplish
the company’s – whether it is interested in maximizing sales or maximizing profit.
- Direct and indirect costs
- British English or American English?
- overheads
- British English
- American English
- overhead
- British English
- American English
- cost centre
- British English
- American English
- cost center
- British English
- American English
- overheads
- Match the definitions with the words below.
- expenses that are not clearly related to production or manufacturing — . . .
- variable costs
- profitable
- overheads
- breakeven point
- cost centre
- fixed costs
- a unit of activity in an organization for which costs are calculated separately — . . .
- breakeven point
- variable costs
- profitable
- overheads
- fixed costs
- cost centre
- costs that depend on the amount produced — . . .
- profitable
- variable costs
- overheads
- fixed costs
- cost centre
- breakeven point
- adjective meaning providing income for a company — . . .
- overheads
- breakeven point
- fixed costs
- profitable
- variable costs
- cost centre
- costs that do not change according to the production volume — . . .
- profitable
- fixed costs
- breakeven point
- variable costs
- overheads
- cost centre
- the sales volume at which a company doesn’t make a loss, but doesn’t make a profit — . . .
- fixed costs
- variable costs
- profitable
- overheads
- breakeven point
- cost centre
- expenses that are not clearly related to production or manufacturing — . . .
- Sort the following into direct, indirect, fixed and variable costs.
- Advertising expenses
- Variable
- Direct
- Indirect
- Fixed
- Bad debts
- Indirect
- Direct
- Variable
- Fixed
- Components
- Variable
- Indirect
- Fixed
- Direct
- Electricity to run machines
- Variable
- Fixed
- Indirect
- Direct
- Electricity for heating
- Indirect
- Variable
- Direct
- Fixed
- Equipment repairs
- Direct
- Variable
- Indirect
- Fixed
- Factory canteen
- Indirect
- Fixed
- Variable
- Direct
- Overtime pay
- Variable
- Direct
- Indirect
- Fixed
- Raw materials
- Indirect
- Variable
- Direct
- Fixed
- Property tax
- Variable
- Direct
- Indirect
- Fixed
- Rent
- Variable
- Indirect
- Direct
- Fixed
- Advertising expenses
- Which of the following statements describes absorption costing and which describes activity-based costing?
- As well as direct manufacturing costs – materials and labour – we allocate part of our fixed and variable manufacturing overheads to the cost of every product. — . . .
- activity-based costing
- absorption costing
- We identify all the different functions within the company, and assign costs to products and services according to how much these functions are involved in the process of providing the products and services. — . . .
- absorption costing
- activity-based costing
- As well as direct manufacturing costs – materials and labour – we allocate part of our fixed and variable manufacturing overheads to the cost of every product. — . . .
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