9 - Finance Continued Flashcards
What is a variable cost
A cost that changes as output does
What is a variable cost also know as
Direct
What is a fixed cost
Costs that don’t change, no matter the level of output
What is meant by stepped fixed costs
Fixed costs that may change in the long term eg rent
What are business rates
Council tax for a business
What are the three lines that are found in a break even chart
Total revenue
Total costs
Fixed costs
Where is the break even point found in a break even chart
Where total revenue crosses total costs
What area shows a loss on a break even chart
Left of break even point
What area on a break even chart shows profit
Right of break even point
Why is using break even useful
- Helps to set targets
- Helps to monitor business success
- Helps to justify obtaining finance
What are problems with using break even
- Fixed costs may change
- Assumes price doesn’t change
- Assumes you sell that quantity
What is the formula for calculating break even
Fixed costs/contribution
What is meant by contribution
Selling price - variable cost
What is meant by margin of safety
The difference between the number of products sold and the break even point
What is meant by a profit centre
A separately-identifiable part of a business for which it is possible to identify revenues and costs (ie calculate profit)
What are examples of profit centres
An individual store in a retail chain
A team within a business
As aid using profit centres
- Supports budget control as finance can be allocated more efficiently
- Can identify who is responsible, which can help for rewards or blame
Disadvantages of profit centres
- Time consuming to monitor individual centres
- Can lead to conflict and competition in a business
- Can be demotivating for a centre who is performing poorly
What is a cost centre
A department for which costs can be solely calculated
What is meant by full costing
All costs are shared equally amongst all products
What is meant by absorption costing
Allocating costs for each product
What is an example of absorption costing
Coca Cola allocating 60% of costs for bottles and 40% for cans
What are examples of key objectives for a financial director
- Break even
- Secure loans
- Obtain sufficient profit
- Minimize tax costs
What are internal factors that influence financial objectives of a firm
- Corporate objective
- Existing debt
- management ambition
- Past trends
What are external factors that could influence a firms financial objectives
- Level of competition
- Position of economy
- STEEPLE factors
What is meant by break even
The number of products that need to be sold to cover all costs
