P1
Fixed Cost
Fixed costs are basically the costs that remain constant and never change regardless of
Oak furniture’s output level. If Oak furniture’s output level increases or decreases, this
won’t affect their fixed costs as the fixed cost will be constant no matter what.
Rent of warehouse and salaries of employees are good examples of fixed costs for Oak
furniture.
Variable Cost
The cost changes with the change in the activity/production. Such as raw material,
wages of Labour, energy used in production, etc. Variable costs vary directly to Oak
furniture’s output level, meaning the sum of all variable costs would depend on Oak
furniture’s output level. For example, if Oak furniture gets more orders then their
variable cost will go up to manufacture the furniture.
Commissions to the salesperson and wages of the workers that Oak furniture would
have to pay as a part of their business operations are good examples of variable costs.
Semi-Variable
It’s not easy to classify all costs as a fixed costs or variable costs. The term used for
these kinds of costs is “semi-variable costs”. Semi-variable costs are costs that are a
mix of both variable costs and fixed costs. Semi-variable cost is a cost that could initially
be a fixed cost and then later down the line change into a variable cost or it can be the
opposite where initially it’s a variable cost, then later turns into a fixed cost. For
example, if the machines in Oak furniture’s production unit work for 8 hours then the
electricity bill would be fixed for every day and if the production order is increased in one
day and the machines run for more than 8 hours then this would become a variable
cost.
Direct Cost
Direct costs are somewhat like variable costs because it compares the costs with output
levels, but direct costs are costs that are directly linked to the levels of output for one of
Oak furniture’s specific goods. Direct costs are the costs that quantify and without which
it is impossible to manufacture any product, in terms of Oak furniture, this product would
be furniture items.
Oak furniture’s carpenter wage would be a good example of one of their many direct
costs.
Indirect Cost
This is the cost that cannot be directly attributed to the production of goods and services
such as depreciation, supervision, security, maintenance, and administrative expenses.
An Indirect cost is a cost that can’t be related to the output level for a specific product.
An indirect cost would be linked with the output levels of Oak furniture but won’t in a
direct way and moreover not for a particular product.
Insurance would be a perfect example of an indirect cost that Oak furniture would have
to pay for.
,Cost Centre
Cost Centre is a business unit that is only responsible for the costs that it incurs. The
manager of the cost Centre is not responsible for revenue generation or asset usage.
This is a process or a function that would occur inside Oak furniture and which doesn’t
directly add to profits, however, it still has a cost of operation that comes with it, for
example, departments in Oak furniture like human resources or accounting. Cost center
would mainly be utilized by Oak furniture so that they can chart all of their actual
expenses in order to carry out a budgeting analysis.
Oak furniture’s IT department is a good example of this.
Absorption Cost
Absorption costing is a way of gathering all of the costs involved in a production process
and apportioning this cost to individual products. This way of costing is needed by the
Accounting standards to make an inventory valuation that is showcased in a
businesses' balance sheet. A product may absorb a broad range of fixed and variable
costs. In Absorption cost, all of the cost is added to the product, variable costs, fixed
costs, indirect and direct costs.
For Oak furniture, calculating the profit in oak furniture by using the absorption costing
method and is used for internal and external decisions.
The formula for absorption cost:
Direct Labour cost + direct material cost + Variable manufacturing overhead cost
+ fixed manufacturing overhead / No. of units produced
Marginal Cost
Marginal costing is referred to as ‘variable costing’, wherein only the variable costs are
gathered and the cost per unit is ascertained strictly on the basis of the variable costs.
Marginal cost tends to be used for internal decision making. Marginal Cost would
differentiate Oak furniture the variable costs and the fixed costs. Oak furniture’s fixed
cost wouldn’t be a part of this type of cost because the fixed cost doesn’t change
regardless of the output level.
Formula: Contribution Margin= Sales – Variable Expense
Activity-Based Costing
Activity-based costing is a management accounting method that keeps track of
overhead costs to activities and then assigns them to objects. In simpler terms, it’s a
method to allocate indirect, overhead costs to products or any department that produces
these costs in the production process. Activity-based costing is the cost that is based on
the activity carried out by Oak furniture, it’s a method of putting Labour and various
other indirect costs like utility and compensation costs, for various goods and services
that are offered by Oak furniture.
,Cost-plus Pricing
This pricing strategy would take place when Oak furniture fixes a selling price by adding
a fixed number/percentage on top of the cost of their product’s production cost. An
example would be, if one of Oak furniture’s goods has a production cost of AED20, Oak
furniture would mark-up or increase the rate of the good to make sure that they earn a
good profit from it. So oak furniture would add AED3 on top of the AED20 then the price
would be 23AED to make a profit which would be AED3.
Discounting Pricing
Discount pricing is a pricing strategy. In this pricing strategy, Oak furniture would set
their products at very high initially and then have put them on sale at what large retailers
would use while selling goods. Oak furniture would use this pricing strategy with the aim
of gaining consumers and trying to expand their current customer base and also
minimize or finish old inventory.
P2
, No. of chairs sold Total revenue Fixed costs Variable costs Total costs Profit
0 0 20000 0 20000 (20000)
100 10000 20000 5000 25000 -15000
200 20000 20000 10000 30000 -10000
300 30000 20000 15000 35000 -5000
400 40000 20000 20000 40000 0
500 50000 20000 25000 45000 5000
600 60000 20000 30000 50000 10000
700 70000 20000 35000 55000 15000
Majority of businesses, if not all businesses would aim to make a profit, however
accomplishing this goal is a rather challenging task and isn’t achievable at all times.
Start-up businesses and other businesses that are smaller in size that face economic
slowdowns realize they can’t obtain sufficient profit. In the current situation, it would be
much more ideal and appropriate for start-up firms and firms that are smaller in size to
aim to break-even rather than setting themselves unrealistic goals such as obtaining
high profits.
This is a breakeven chart, the different colored lines have different meanings behind
them. The blue line indicates Oak furniture total revenue, the red line indicates oak
furniture fixed costs, the yellow line indicates oak furniture variable costs, the green line
Fixed Cost
Fixed costs are basically the costs that remain constant and never change regardless of
Oak furniture’s output level. If Oak furniture’s output level increases or decreases, this
won’t affect their fixed costs as the fixed cost will be constant no matter what.
Rent of warehouse and salaries of employees are good examples of fixed costs for Oak
furniture.
Variable Cost
The cost changes with the change in the activity/production. Such as raw material,
wages of Labour, energy used in production, etc. Variable costs vary directly to Oak
furniture’s output level, meaning the sum of all variable costs would depend on Oak
furniture’s output level. For example, if Oak furniture gets more orders then their
variable cost will go up to manufacture the furniture.
Commissions to the salesperson and wages of the workers that Oak furniture would
have to pay as a part of their business operations are good examples of variable costs.
Semi-Variable
It’s not easy to classify all costs as a fixed costs or variable costs. The term used for
these kinds of costs is “semi-variable costs”. Semi-variable costs are costs that are a
mix of both variable costs and fixed costs. Semi-variable cost is a cost that could initially
be a fixed cost and then later down the line change into a variable cost or it can be the
opposite where initially it’s a variable cost, then later turns into a fixed cost. For
example, if the machines in Oak furniture’s production unit work for 8 hours then the
electricity bill would be fixed for every day and if the production order is increased in one
day and the machines run for more than 8 hours then this would become a variable
cost.
Direct Cost
Direct costs are somewhat like variable costs because it compares the costs with output
levels, but direct costs are costs that are directly linked to the levels of output for one of
Oak furniture’s specific goods. Direct costs are the costs that quantify and without which
it is impossible to manufacture any product, in terms of Oak furniture, this product would
be furniture items.
Oak furniture’s carpenter wage would be a good example of one of their many direct
costs.
Indirect Cost
This is the cost that cannot be directly attributed to the production of goods and services
such as depreciation, supervision, security, maintenance, and administrative expenses.
An Indirect cost is a cost that can’t be related to the output level for a specific product.
An indirect cost would be linked with the output levels of Oak furniture but won’t in a
direct way and moreover not for a particular product.
Insurance would be a perfect example of an indirect cost that Oak furniture would have
to pay for.
,Cost Centre
Cost Centre is a business unit that is only responsible for the costs that it incurs. The
manager of the cost Centre is not responsible for revenue generation or asset usage.
This is a process or a function that would occur inside Oak furniture and which doesn’t
directly add to profits, however, it still has a cost of operation that comes with it, for
example, departments in Oak furniture like human resources or accounting. Cost center
would mainly be utilized by Oak furniture so that they can chart all of their actual
expenses in order to carry out a budgeting analysis.
Oak furniture’s IT department is a good example of this.
Absorption Cost
Absorption costing is a way of gathering all of the costs involved in a production process
and apportioning this cost to individual products. This way of costing is needed by the
Accounting standards to make an inventory valuation that is showcased in a
businesses' balance sheet. A product may absorb a broad range of fixed and variable
costs. In Absorption cost, all of the cost is added to the product, variable costs, fixed
costs, indirect and direct costs.
For Oak furniture, calculating the profit in oak furniture by using the absorption costing
method and is used for internal and external decisions.
The formula for absorption cost:
Direct Labour cost + direct material cost + Variable manufacturing overhead cost
+ fixed manufacturing overhead / No. of units produced
Marginal Cost
Marginal costing is referred to as ‘variable costing’, wherein only the variable costs are
gathered and the cost per unit is ascertained strictly on the basis of the variable costs.
Marginal cost tends to be used for internal decision making. Marginal Cost would
differentiate Oak furniture the variable costs and the fixed costs. Oak furniture’s fixed
cost wouldn’t be a part of this type of cost because the fixed cost doesn’t change
regardless of the output level.
Formula: Contribution Margin= Sales – Variable Expense
Activity-Based Costing
Activity-based costing is a management accounting method that keeps track of
overhead costs to activities and then assigns them to objects. In simpler terms, it’s a
method to allocate indirect, overhead costs to products or any department that produces
these costs in the production process. Activity-based costing is the cost that is based on
the activity carried out by Oak furniture, it’s a method of putting Labour and various
other indirect costs like utility and compensation costs, for various goods and services
that are offered by Oak furniture.
,Cost-plus Pricing
This pricing strategy would take place when Oak furniture fixes a selling price by adding
a fixed number/percentage on top of the cost of their product’s production cost. An
example would be, if one of Oak furniture’s goods has a production cost of AED20, Oak
furniture would mark-up or increase the rate of the good to make sure that they earn a
good profit from it. So oak furniture would add AED3 on top of the AED20 then the price
would be 23AED to make a profit which would be AED3.
Discounting Pricing
Discount pricing is a pricing strategy. In this pricing strategy, Oak furniture would set
their products at very high initially and then have put them on sale at what large retailers
would use while selling goods. Oak furniture would use this pricing strategy with the aim
of gaining consumers and trying to expand their current customer base and also
minimize or finish old inventory.
P2
, No. of chairs sold Total revenue Fixed costs Variable costs Total costs Profit
0 0 20000 0 20000 (20000)
100 10000 20000 5000 25000 -15000
200 20000 20000 10000 30000 -10000
300 30000 20000 15000 35000 -5000
400 40000 20000 20000 40000 0
500 50000 20000 25000 45000 5000
600 60000 20000 30000 50000 10000
700 70000 20000 35000 55000 15000
Majority of businesses, if not all businesses would aim to make a profit, however
accomplishing this goal is a rather challenging task and isn’t achievable at all times.
Start-up businesses and other businesses that are smaller in size that face economic
slowdowns realize they can’t obtain sufficient profit. In the current situation, it would be
much more ideal and appropriate for start-up firms and firms that are smaller in size to
aim to break-even rather than setting themselves unrealistic goals such as obtaining
high profits.
This is a breakeven chart, the different colored lines have different meanings behind
them. The blue line indicates Oak furniture total revenue, the red line indicates oak
furniture fixed costs, the yellow line indicates oak furniture variable costs, the green line
