Chapter 29

costs
By
Ram prasad parajuli (prem), Ph D.
 Concept cost
A cost is an expenditure required to produce or
sell a product or get an asset ready for normal
use. In other words, it’s the amount paid to
manufacture a product, purchase inventory,
sell merchandise, or get equipment ready to
use in a business process and support to
increase the revenue or income of business. It
is key factor of profit of business. Level of
cost determine the efficiency of cost.
 Classification of cost
Classification of Costs essentially means the grouping of costs
according to their similar characteristics. Now, in costing there are
a dozen ways to classify costs as per their nature and functions.
Here we will be focusing on five such classifications.
•Direct cost- that cost which is related with production or
purchase of product.
•Indirect cost- that cost that can not be identified with a unit of
production.
•Fixed cost- same as indirect cost
•Variable cost – same as direct cost
•Marginal cost- that cost which take place the extra cost of
production of extra one unit.
 Break even analysis
That level of operation/ production/ sales
Where your company total sales revenue is
equal with your total expenses is called break
even point. This means that you’re bringing in
the same amount of money you need to cover
all of your expenses and run your business. It
is also known neither profit nor profit level of
business. Evaluation of that point of operation
known as BEP analysis.
 Break even point
BEP= fixed cost
contribution
Contribution = selling price – variable cost
Your fixed costs total is $6,000, your variable
costs per unit is $25, and your sales price per
unit is $50. find out your break-even point in
units.
BEP= $6,000 / ($50 – $25) = 240 units
Margin of safety = total sales- BEP
 BEP in graph

Cost &

revenue
 Importance of BE Analysis
•A break-even analysis provides a business with a clear idea of how
much needs to be achieved in sales to avoid a loss and make a profit. 
•As such, the results of your break-even analysis should help you
determine how attractive a given opportunity is  whether that’s
investing in a new product, acquiring a new department or business,
or extending into new markets.
•If you have multiple routes available to you, analyzing each of them
and determining their respective break-even points would help to
decide which is the most favorable.
•Identifying break-even point also helps to reduce risk by factoring in
both fixed and recurring costs so there should be no nasty surprises
along the way. 
 Over to you
Labour cost per unit $12
Materials cost per unit $18
Variable overhead per unit $5
Fixed cost $ 200,000
Selling price $ 45
Maximum capacity= 30,000 units
Required
1. BEP
2. Margin of safety in maximum capacity
3. Plot the above information in graph and determine the BEP