analysis of unit prices In economics, the price of a good is the amount of money given by a buyer in exchange for one unit of it. In contrast, the cost to produce or acquire one more unit is called its marginal cost. In competitive markets, as long as total demand equals total supply at equilibrium price and quantity, profit will tend to equal zero due to perfect competition. Therefore if a company’s costs are less than its revenue, it will have positive profits. If the cost of producing another unit of output is less than the selling price of that unit, then maximizing profit requires selling all units up to the point that the additional revenue generated by selling that additional unit is less than the additional cost of producing that unit. The average cost or average variable cost (ACV) is a term used in accounting and management accounting to describe total costs due to direct material, labor and overhead. It represents total variable costs as it includes items such as material, labor and manufacturing overhead expense. The ACV includes all input expenses which are directly related to the production of economic value added. The ACV can be calculated by dividing the total variable expenses by the number of units produced during the period. The average fixed cost (AFC) is a term used in managerial economics to describe an expenditure that does not vary with production levels. Although AFC can apply to any type of expenditure, it is most often used in reference to the cost of production facilities, equipment, etc. Generally speaking, expenses are classified as being either variable or fixed with respect to business operations. Fixed costs are those that do not change with changes in level of business operations, for example rent on a building or salaries for all employees on staff. Variable costs are those that do change with the level of business operations, for example raw materials, fuel, utilities, etc. The budgeted total cost (BFC) is the sum of the variable cost plus the fixed cost. The overall total expense tends to remain constant or relatively constant during a period of time or over a range of production volumes. Thus it can be said that for this type of costs they do not vary considerably with changes in business volume.
1. List five ways to control costs.
2. What is meant by accounting variance? Give two examples along with their application areas.
3. Explain why direct labor is termed as variable expense?
4. Write short notes on average fixed cost, marginal cost, variable cost and total cost.
5. What do you understand by variable costing system? Explain with an example.
6. Differentiate between variable costing system and absorption costing system.
7. What do you understand by absorption costing? How does it benefit the institution?
8. Define mixed-costing method of allocation of joint expenses? Illustrate its application with suitable example.
9. What is meant by direct/indirect material cost allocation? Suggest ways to apportion direct/indirect materials costs under variable costing system of accounting in case of joint products manufactured over a period of time!
10.
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