Business AS · Finance and accounting. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Costs are sorted in two ways. By behaviour: fixed costs stay the same when output changes in the short run (rent), while variable costs change in direct proportion to output (materials). By link to the product: direct costs can be traced to one product, and indirect costs (overheads) are shared by the whole business.
Full costing charges every cost, including a share of overheads, to each product. Contribution costing charges only variable costs. Contribution is what each unit gives towards paying the fixed costs; once they are covered, further contribution is profit.
Break-even output is where total revenue equals total costs, so profit is zero. On a chart it is where the total revenue line crosses the total cost line.
Students divide fixed costs by the selling price instead of by the contribution per unit. Each unit sold must first pay for its own variable cost; only what is left pays the fixed costs.
Answer: Break-even 3,000 units, margin of safety 800 units, profit $14,400.
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