5.4 Costs Quizs

Costs

• are expenses that a business has to pay to engage in its trading activities.

• are profits generated from sales.

• are investments made in assets for future growth.

• are savings accumulated over time.

Revenue

• is the income a business receives from selling its goods or services.

• is the total expenses incurred by a business in a given period.

• is the profit made after deducting all costs from sales.

• is the amount of money a business pays to its employees.

Marginal cost

• is the total cost of production for all units.

• is the extra cost resulting from producing one additional unit of output.

• is the fixed cost associated with production.

• is the average cost of producing multiple units.

Direct costs

• are fixed costs that do not change with output.

• can be related to the production of a particular product and vary directly with the level of output.

• are costs that are incurred regardless of production levels.

• are costs that only apply to service industries.

Contribution pricing

• is based on the notion that any price set lower than the variable cost of producing a product is making a payment towards fixed costs.

• is based on the notion that any price set that is higher than the variable cost of producing a product is making a payment towards fixed costs.

• is determined solely by the market demand for the product, regardless of production costs.

• is a pricing strategy that ignores fixed costs entirely.

Average costs

• the total cost of production divided by the number of units produced.

• the total revenue divided by the number of units sold.

• the total profit divided by the number of units produced.

• the total expenses divided by the number of units sold.

Indirect costs

• are costs that can be directly attributed to a specific product.

• are overheads that cannot be allocated to the production of a particular product and relate to the business as a whole.

• are expenses that vary with production levels.

• are costs that are incurred only when producing a product.

Contribution costing

• calculates the cost of a product solely on the basis of variable costs, thus avoiding the need to allocate fixed costs.

• calculates the total cost of a product including both fixed and variable costs.

• focuses only on the fixed costs associated with a product.

• is used to determine the selling price of a product based on market demand.

Full costing

• allocates all the costs of production for the whole business and is also known as absorption costing.

• only considers variable costs in production.

• is used exclusively for financial accounting purposes.

• is a method that ignores fixed costs.

Contribution

• the total revenue generated by a business

• the difference between sales revenue and variable costs of production

• the fixed costs incurred by a business

• the profit margin after all expenses are deducted