1. What is conversion cost
Direct labour and overhead are called conversion cost
2. What is Prime Cost
Direct material and direct labour are referred to as prime cost
3. Define Variable cost
Variable costs are expenses that change in proportion to the activity of a business
4. Define Direct cost
Direct Costs, however, are costs that can easily be associated with a particular cost object
5. Are all variable cost classified as direct cost?
Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.
6. What is contribution margin
- Contribution margin is the marginal profit per unit sale.
- Contribution margin analysis is a measure of operating leverage: it measures how growth in sales translates to growth in profits.
- High contribution margins are prevalent in labour-intensive tertiary sector
- Low contribution margins are prevalent in capital-intensive industrial sector.
7. What is CVP analysis?
Cost-Volume-profit(CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.
8. What are the assumptions used in CVP analysis
- The behaviour of both costs and revenues is linear throughout the relevant range of activity.
- Costs can be classified accurately as either fixed or variable.
- Changes in activity are the only factors that affect costs.
- All units produced are sold ie there is no finished goods inventory
- When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.
9. What is break –even point.
In Cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain.
Break even point (for output) = fixed cost / contribution per unit
Contribution (per unit) = selling price (per unit) - variable cost (per unit)
Break even point (for sales) = fixed cost / contribution (per unit) * selling price (per unit)
10.Define Margin of safety
Margin of safety represents the strength of the business. It enables a business to know what is the exact amount he/ she has gained or lost and whether they are over or below the break even point.
The actual sales minus break even sales gives the margin of safety.
