2.2 - Summary Flashcards
How might a business conduct a sales forecast?
In decision-making and managing cash flow
What are the limitations of sales forecasting?
Unforeseen external shocks
Fluctuating customer tastes and preferences
How is the profit calculated?
Profit = Total Revenue - Total Costs
What is the difference between variable costs and fixed costs?
Variable costs are those that change directly with the levels of output and sales (e.g. materials)
Fixed costs are those that don’t change with the levels of output and sales
How might a business increase its revenue?
Stimulating more demand or increasing prices
How is the break-even point calculated?
Break-even point = Fixed costs/contribution per unit
What three pieces of information are included on a breakeven chart?
Fixed costs / total revenue / total costs
Give three reasons why a business might use break-even analysis
Decide if the business is profitable
Assess changes in the level of production
Identify the level of output and sales needed to make a profit
Identify two ways a business could lower its break-even point
Raise prices
Lower costs
What is the margin of safety?
The difference between the break-even point and the current level of output
Give two limitations of break-even analysis
Costs are rarely constant
Presumes the business will sell all of its output at the same price
Give two examples of an expenditure budget
Labour costs
Material costs
What is an adverse variance?
A bad outcome in terms of finance
Give two reasons why it is difficult to forecast accurate budgets
Only as accurate as the data it’s based on
Past trends are a poor indicator of what is likely to happen in the future
