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Business Studies > 2.2 (Done) > Flashcards

2.2 (Done) Flashcards

1
Q

Define average cost.

A

The cost of producing one unit.

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2
Q

Define profit.

A

The financial gain of a business through trading.

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3
Q

Define sales volume.

A

The quantity of output sold in a particular time period.

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4
Q

Define total revenue.

A

The amount of money the business receives from selling output.

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5
Q

Define sales revenue.

A

The value of output sold in a particular time period.

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6
Q

What is the formula for sales revenue?

A

Price X Quantity of output

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7
Q

What are four examples of business costs?

A
  • Wages.
  • Raw materials.
  • Insurance.
  • Rent.
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8
Q

What is the ‘short run’?

A

The period of time when at least one factor of production is fixed.

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9
Q

Explain the example of a firm wanting to expand production in its factory in the short run.

A

In the short run, a firm can acquire more labour and buy more raw materials but it has a fixed amount of space in the factory and a limited number of machines.

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10
Q

Using the same example of the factory, what can the firm do in the long run?

A

In the long run, the firm can buy another factory and add to the number of machines, increasing its capacity.

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11
Q

Define fixed costs.

A

Costs which stay the same at all levels of output in the short run.

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12
Q

What are two examples of fixed costs?

A
  • Rent.

- Insurance.

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13
Q

What is a reason why fixed costs could increase?

A

Inflation.

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14
Q

What are variable costs?

A

A cost that rises as output rises.

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15
Q

What are two examples of variable costs?

A
  • Raw materials.

- Wages.

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16
Q

Define total cost.

A

The entire cost of producing a given level of output.

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17
Q

What is the formula for total cost?

A

TC= Fixed cost + Variable cost

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18
Q

What is the formula for average cost(unit cost)?

A

Total cost
——————
Output

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19
Q

What is the formula for profit?

A

Total revenue - total costs

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20
Q

Define contribution.

A

The difference between selling price and variable costs.

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21
Q

What is the formula for Contribution per unit?

A

Selling price - Variable cost.

22
Q

What is an example of working out contribution?

A

If I bought a watch for £150 and sold it for £250 then the contribution is £100. This £100 will contribute to the fixed costs of the business and the profit.

23
Q

What are the two formulas for total contribution?

A

Total revenue - Total variable cost.

Unit contribution X Number of units sold.

24
Q

What is the break-even point?

A

Where total costs are exactly the same as total revenue.

25
Q

What is the break-even output?

A

The level of output a business needs to produce so that total costs are exactly the same as total revenue.

26
Q

What is the formula for break-even output using contribution?

A

Fixed costs
Break-even output= —————————
Contribution

27
Q

Define margin of safety.

A

The range of output between the break-even level and the current level of output, over which a profit is made.

28
Q

How can the margin of safety be identified on the break-even chart?

A

By measuring the distance between the break-even level of output and the current (profitable) level of output.

29
Q

Why do businesses prefer to have a large margin of safety?

A

Because if sales drop they still might make a profit.

30
Q

What are three questions that break-even analysis helps to answer?

A
  • If the price went up, what would happen to the break-even price.
  • What will happen to the break-even point if costs are forecast to rise?
  • If the business introduced a new product line, how many would the new product have to sell to at least break-even?
31
Q

Give a reason why break-even analysis can be very important to a business.

A

Break-even analysis is found in business plans so it might be vital in gaining finance from banks.

32
Q

What are three limitations of break-even analysis?

A
  • It assumes that all output is sold, so that output equals sales, and no stocks are held.
  • The break-even chart cannot cope with a sudden increase in wages and prices or changes in technology.
  • The break-even calculations are only as accurate as the data they are based on.
33
Q

What is the formula for margin of safety?

A

Actual sales - break-even level of sales

34
Q

Define a budget.

A

An estimate of income or expenditure for a set period of time.

35
Q

What are four reasons why a business will create budgets?

A
  1. Planning.
  2. Forecasting.
  3. Communication.
  4. Motivation.
36
Q

How does a budget help planning within a business? (2)

A
  • Can plan for any expenses in the year.

- Can identify where and when a business may run into financial problems.

37
Q

How does a budget help a business with forecasting?

A

Using the business’ sales and expenditure forecasts, they can prepare projected profits for the next 12 months.

38
Q

How does a budget help communication within a business?

A

Setting up a budget is an ideal opportunity for the owners to communicate their objectives of the business in a financial plan.

39
Q

How can a budget motivate staff? (2)

A
  • Can motivate staff to be more careful with the finances.

- Provides workers with targets and standards.

40
Q

What are the two types of budget?

A
  1. Historical budget- set using current financial figures and based on historical performance of the business.
  2. Zero-based budget- set by using figures based on potential performance.
41
Q

What is an advantage of a historical budget?

A

It’s realistic because it’s based on last year’s sales.

42
Q

What are some drawbacks of a historical budget?

A

Doesn’t take into account shocks, uncertainty, dynamic markets or actions of competitors.

43
Q

What is an advantage of using a zero-based budget?

A

Can be used by a start-up with no historical data.

44
Q

What are three difficulties of budgeting?

A
  • Tendency for managers to spend up to the limit.
  • Time consuming to prepare, monitor and control.
  • Unrealistic budgets can be demotivating.
45
Q

What are two limitations of budgeting?

A
  • Can cause inter-department rivalry as some departments get more than others.
  • Can make managers short-term and short-sighted.
46
Q

Define variance.

A

The difference between actual financial incomes.

47
Q

Define variance analysis.

A

The process of calculating variances and attempting to identify their causes.

48
Q

What are five examples of variances?

A

Wages, materials, overheads, profit and sales revenue.

49
Q

What is favourable variance?

A

When a manager has underspent, and so cut costs, impacting profits.

50
Q

What is adverse variance?

A

Overspending.

51
Q

Why might a manager overspend their budget?

A

Due to needing more staff than was budgeted for.

Business Studies (15 decks)

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