Management of costs.

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        Management Accounting

Management of costs

Fixed costs are the expenses that do not alter in relation to changes in demand or output (in the short term). They have to be paid whether the business trades or not. Examples are rent, depreciation and interest charges.

Variable cost is the cost that varies in direct proportion to changes in output, such as raw materials, components, piece-rate labour and energy used in production. In other words, these are costs that should double if output doubles. Although break-even charts require the assumption that some costs vary in direct proportion to changes in output, in practice it is unlikely that any costs will be totally variable.

For instance, raw materials are likely to cost less per unit when buying in bulk. Therefore the materials cost might not quite double when output doubles. Examples of variable costs are materials, labour e.t.c.

Semi-variable costs are costs that vary with output, but not in direct proportion. Therefore, in order to calculate total costs at a specific level of output, a manager would have to work out the semi-variables especially. This makes them hard to deal with, notably in break-even analysis.

Examples of semi-variables include maintenance expenditure and telephone bills. In the latter case, it is clear that although a doubling of customer demand would not necessarily double a firm's telephone calls or bills, it is reasonable to expect that they would increase. Therefore the telephone is neither a fixed nor a variable cost.

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It is important to classify costs because it helps with spending, it helps with budgets and help in producing break-even charts.

Break-even Analysis

Break-even has many assumptions and limitations: -

There is an assumption that all data behaves in a linear manner.

The unit costs may fall as output increases. Some costs may be stepped in nature.

In the practice there are many influences on costs and revenues- changes in technology, changes in level of productivity.

The break-even chart assumes that the only factor affecting costs and revenues is sales ...

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The report states three main terms, these are 'Fixed Cost', 'Variable Cost' and 'Semi-Variable Cost'. These three terms are explained well within the report which should allow the exmainer to understand with ease. The student has in-putted a number of charts/graphs which help support the student's writing. This should allow the examiner to understand with ease with the use of these graphs/chars.

The student has listed a number of assumptions and limitations with break even analysis. However the student hasn't justified why there might be some limitations within this method. The report could include 'With any accounting policy, there may be some limitations, as there are too many factors which could change. It' important to notice any factors which may effect the outcome of break even analysis'.

In summary, the report is quite good in the sections which are complete. The report states three different types of cost, and has given examples of the Net Present Value and Payback Period. However some parts are missing, and this should be completed. The student understands three main terms, which is essential to understand break even analysis which is further below the report. The student has given an example, and worked out the 'Net Present Value' and worked out their 'Payback Period', which is necessary when a buisness evaluates an investment idea/concept. Task 6, 7, 8 & 9 are missing. This should be added to the report, before submitting to the examiner. In addition, Task 11 is quite unclear. The student should write a little and explain what this shows.