3.2: Costs and Revenues Flashcards
Define cost
what you have to give up in order to gain something
- expenditure for production
Define price
The amount demanded by seller from buyer
Differentiate cost vs price
Price includes the markup
Outline the two types of cost
- fixed cost
- variable cost
Define fixed cost
- costs that doesn’t change with the sales or level of production
- e.g.: rent, management salary, tax
Define variable cost
- costs of production that change according to sales and level of production
- e.g.: make 3 cakes? pay 20 for ingredients make 4 cakes? pay 30.
Differentiate variable cost and fixed cost graphs
Define total cost
TC = TOTAL variable cost + TOTAL fixed cost
Outline what is a semi variable cost and example
- Elements of fixed and variable cost
- But becomes variable after exceeding a certain level of output
- e.g.: Nightclubs, after a certain cost, you have to pay additional.
- e.g.: Bonuses after selling a lot for (salesman’s salary)
Define direct cost
- costs that are directly related to product itself
- -e.g.: cost of lemon for lemonade
Define indirect cost
- Part of the fixed cost
- No fixed connection to product.
Give the formula for Total Variable Cost
TVC (tot. var. c.) = AVC (average varcost) x Quantity
Why is airplane food a fixed cost
They always stock assuming full capacity and the excess food are perishable so they have to factor that in cost
Define revenue
- The amt of money that comes in the company
- aka profit (but net profit —> deducted the costs)
Give the revenue formula
Price x Quantity sold
Give the average revenue formula
Total revenue / Quantity
Outline the revenue streams
- Advertising (e.g. celeb endorsements)
- Transaction fees
- franchise cost and royalties
- sponsorship
- subscription fees
- dividends
- donation
Define what is a break-even analysis
- determines how much you should be selling not to have profit or any loss
Why do we need a break even point?
- To determine the minimum selling price/quantity to be sold;
- so that your price is not lower than your cost
- if cost = 80, you cant sell at 70 — so your break even point is 90, for example
‘Define contribution
- amt. of money that remains after deducting the variable/direct cost
- the contribution to fixed cost — amt available per product to pay for fixed cost
Give the profit formula
REVENUE - COSTS
(if total, -> total profit = total revenue - total costs)
ChatGPT: Total contribution - total direct cost (??)
Define the relationship between the level of output and total cost
Directly proportional (^ lvl of outpt - ^ tital cost)
Define what is a break-even point
when Sales Revenue = Total costs (including contribution, etc.)
- no profit nor loss
Give the Break-Even Point formula
Fixed costs / (Selling Price - Variable Cost : AKA unit contribution)
Give the formula for the total cost
(Selling Price - Variable Cost) - Fixed cost
Give the formulas for total contribution
total revenue - total cost OR contribution per unit x quantity of unit sold
selling price - variable cost (?)
Formula for Profit volumer ratio
Total contribution / Sales x 100
Volume of sales at BEP formula
Fixed costs / (Profit Volume ratio)
What should we use to get the Break Even Point if units sold isn’t given
1.) Get total contribution (Total revenue - total variable cost)
2.) Use P/V formula
3.) Get the sales at BEP
Define limiting factors
The factors that hinders the business’ ability to achieve its goals
Define contribution per (currency) of sales (?) | Generally, by what metric could “the best product” of a business be considered by?
Under normal situations, the best product of a business makes the most profit to satisfy the fixed cost (?)
When is the “contribution per (currency) of sales” not true
- a factory producing a particular range of products may depend on a highly skilled labor force
Define sales aka revenue, income, turnover, takings
The income generated from sale of goods or services
How to calculate total sales aka total revenue
Total sales = quantity sold x selling price
Differentiate and compare cost and price
Cost: cost of production/buying for the production — POV of buyer
Price: amount that the product is sold, set by the seller
-> can be the same value BUT of different perspectives
What are indirect costs also called?
Administrative costs
Define cost centres
A department in an organization that will not earn revenue but still costs
e.g.: Marketing department, customer service, research and development (do not earn mondy), HR
Why is marketing department called a cost centres
They do not directly lead to sales
Define profit centres
Departments directly related to generation of sales
e.g.: Sales department, retail branches
What is a profit and loss account AKA income statement (Describe) [4]
- shows the income and expenditure statement (determines the flow of money per year)
- Annual fiscal year
- Purpose: determines if made profit or loss
- Three parts: trading account, profit and loss account and appropriation account
Describe the trading account
Shows diff between what has been received - direct costs or variable costs
Gross profit = Sales Revenue - Costs of Sales
-
Describe the profit and loss account
Shows the deduction of all expenses — indirect costs
Define bad debt
Debts owed to you BUT! You weren’t able to collect
Define depreciation
Rate of obsolescence
Define the rate of obsolescence + why can’t it go below 1 (unit of money here) (DB for last)
- The rate of obsolescence refers to the speed at which a product, technology, or service becomes outdated or no longer relevant in the market. It is the pace of becoming obsolete.;
- The rate of obsolescence can go down below 1 if innovations, updates, or improvements in a particular field or industry occur at a slower pace compared to the past. For example, if technological advancements slow down or if there is less demand for rapid updates in a specific sector, the rate of obsolescence may decrease. This could result from market saturation, mature technologies, or a lack of significant breakthroughs.
Describe allocation (Profit and Loss Statement)
What to do with the net income
- e.g.: dividends, retained income
Define retained income
Income stayed within the company (e.g. not guven out as dividends)
Purpose of income statement
To know where the money comes from and goes — a record of a transaction
Differentiate fiscal year vs normnal year
Fiscal year - when the business starts
Why do businesses use fiscal year?
Depends on the sale trends (e.g. Christmas = ^ sales) +
- e.g. August in the Philippines, there’s less sales/transactions, so companies will record their finance
(Not december because they need to do sales due to christmas)
-e.g.: Schools start at August so thats the beginning of their fiscal year
