business revenue and costs Flashcards
what is meant by revenue
revenue is the money a business makes from sales. the total amount of money a business receives from it sales is called total revenue
how is total revenue calculated
total revenue = quantity sold X selling price
how is profit calculated
profit = total revenue - total costs
how is total costs calculated
total costs = fixed costs + variable costs
how is break even calculated
fixed costs
/
selling price per unit - variable cost per unit
what is meant by break even
a diagram that shows the level of output where a business does not make a profit nor a loss
what are the different types of costs to a business
fixed costs
variable costs
semi - variable costs
direct costs
indirect / overhead costs
total costs
what is a fixed cost
fixed costs do not vary / change with output. fixed costs only change in the long run. for example: rent, management salaries, interest charges and depreciation
what is a variable cost
a cost that can vary in direct proportion to changes in output. for example raw materials, fuel and labour
what is a semi variable cost
costs that contain both fixed and variable elements, such as telephone charges where there is a fixed standing charge plush an extra rate that caries according to the number of calls made
what is a direct cost
costs that arise specifically from the production of a product or the provision of a service.
examples:
rent on a shop
direct labour
materials or components
these direct costs can be totaled to give the direct costs of producing the product. however, revenue minus the direct costs does not indicate profitability. the business must also apportion overheads or indirect costs to the product
what are overheads / indirect costs
costs not directly related to production
examples:
advertising costs
employing the secretary or receptionist
what is meant by contribution
it is the difference between the income generated from sales and the variable costs of producing the goods those sales. this allows a business to analyse whether each of its products covers its own variable costs .
contribution is used to pay the companies overheads (fixed costs). once these have been covered, additional contribution generates profit
how is contribution calculated
contribution per unit = selling price per unit - variable costs per unit
what is the margin of safety
it shows how much a producer can reduce output before the business starts to make a loss
whatare the advantages of using break-even
easy visual means of analyzing a businesses financial position at different levels of output
gives a valuable rule-of-thumb guide to potential profitability
cheap to construct and can be carried out quickly
profit and loss situation can been seen at a glance - good for nonfinancial- specialists
helpful for making decisions in ‘what if’ situations - can cope with changing circumstances in relation to revenue and cists
can be used as past of a business plan and can be helpful in gaining finance
target setting made easier
can identify the margin of safety - aids planning
what are the limitations of break even
often regarded as too simplistic as some assumptions are unrealistic
it assumes all output is sold, which is often not the case
assume conditions remain unchanged - wages, prices and technology can all change suddenly
relies on data being accurate and often under or over-estimates are made
assumes that total revenue and cost curves are always linear - this may not be the case.
allocating fixed costs in a multi product business can be problematic - thus making break-even analysis output inaccurate .
fixed costs are often stepped- this makes break - even analysis difficult
what is profit
the difference between the total revenue of a business and the total cost of a business, when revenue is greater than cost
