3.3 Costs And Revenues Flashcards
What are costs in a business context?
Costs refer to the sum of money incurred by a business in the production process, such as costs of raw materials, wages, salaries, insurance, advertising, and rent.
Costs can be categorized into different types, such as fixed, variable, set-up, and running costs.
What is the definition of price?
Price refers to the amount of money a product is sold for; it’s the sum paid by the customer to purchase goods or services.
Price is distinct from cost, which relates to the expenses incurred in producing the goods.
What are set-up costs?
Set-up costs are expenditures related to starting a business, such as purchasing equipment and deposits paid to utility companies.
Set-up costs are one-time expenses incurred before a business begins operations.
What are running costs?
Running costs are the ongoing costs of operating a business, such as wages, salaries, and insurance premiums.
These costs continue to occur regardless of production levels.
What are fixed costs?
Fixed costs are costs that do not vary with the level of output; they must be paid even if there is no output.
Examples include rent on leased premises and interest payments on bank loans.
What are variable costs?
Variable costs are production costs that change in proportion to the level of output, such as raw materials and hourly wages of production workers.
As output increases, total variable costs also increase.
Fill in the blank: Total costs (TC) is the sum of all ______ and ______ costs.
variable; fixed
Total costs reflect the overall expenses incurred in production.
What happens to total variable costs if the level of output doubles?
Total variable costs also double.
This demonstrates the direct relationship between output levels and variable costs.
What is included in running costs?
Running costs include:
* Wages and salaries
* Insurance premiums
* Utilities
* Marketing costs
* Maintenance costs
These costs are essential for the day-to-day operation of a business.
True or False: Fixed costs can change based on the level of output.
False.
Fixed costs remain constant regardless of production levels.
What are examples of set-up costs?
Set-up costs may include:
* Purchasing equipment
* Deposit paid to utility companies
* Legal and professional fees
* Initial stock or supplies
These costs are incurred before the business begins its operations.
What does the total costs line represent on a graph?
The total costs line starts at the same value as total fixed costs because fixed costs must be paid even with no output.
The difference between total costs and total variable costs at each level of output indicates the total fixed costs.
What are examples of variable costs?
Variable costs include:
* Raw materials
* Commission earned by sales staff
* Hourly wages of production workers
These costs fluctuate with the level of production.
Fill in the blank: If there is no production, total value of variable costs should be ______.
zero.
This indicates that variable costs are directly tied to production activity.
What are the components of total costs?
Total costs consist of:
* Total variable costs (TVC)
* Total fixed costs (TFC)
Understanding these components helps in cost management and pricing strategies.
What are direct costs?
Costs specifically attributed to the production or sale of a product or service.
Direct costs can include variable costs like raw materials and fixed costs. They can be tracked back to the output of a product or a specific cost center.
Give examples of direct costs.
- Raw materials
- Variable costs for a specific product
- Salaries for production staff
- Direct labor costs
Direct costs are essential for determining the cost of goods sold.
What are indirect costs?
Costs that do not directly relate to the production or sale of a specific product.
Indirect costs cannot be clearly traced to the production or sale of any single product.
Provide examples of indirect costs.
- Rent
- Advertising
- Legal expenses
- Salaries for administrative staff
- Insurance premiums
- Utility costs
Indirect costs are also referred to as overheads.
