A-Level Business > Costs, revenue and profit > Flashcards
Costs, revenue and profit Flashcards
Cost
How much it costs to make the product
Revenue
Total sales generated from selling the profit
profit
Revenue - cost. The profit taken after taking revenue away from costs
Total cost
Fixed costs + Variable Costs
Average cost
Total Costs / Output
The cost of producing one unit
Fixed cost
Costs that do not change as output or sales change
Variable cot
Costs that change when output or sales change
Total revenue
Total sales x Price per unit
Price
The price at which the business charges for its product
Average revenue
Total Revenue / Number of sales
Direct costs
Costs that are directly attributed to a unit output (Raw Materials)
Indirect costs
Costs that can not be attributed to a particular unit of output
Overhead costs
Overhead refers to the ongoing costs to operate a business but excludes the direct costs associated with creating a product or service.
How to calculate revenue
Sales x Price charged per unit
How to calculate profit
Total Costs - Revenue
How to calculate total cost
Fixed Cost + Variable Cost
How to calculate average cost
Total Cost / Output
How to calculate fixed costs
All fixed costs added together
How to calculate variable costs
All variable costs added together
How to calculate total revenue
Total Sales x Price per output
How to calculate average revenue
Total Revenue / Number of Sales
The importance of direct costs to a business
Cost control: Understanding and managing direct costs is crucial for controlling the overall costs of a business. By keeping direct costs as low as possible, a business can increase its margins and profitability.
Pricing strategy: Direct costs play a key role in determining the pricing strategy of a business. By accurately tracking and accounting for direct costs, a business can ensure that it is pricing its goods or services at a level that allows it to cover its costs and make a profit.
Cost-volume-profit analysis: Direct costs are an important component of cost-volume-profit analysis, which helps a business to understand the relationship between its costs, sales volume, and profitability. By considering direct costs, a business can make informed decisions about production levels, pricing, and other aspects of its operations that can impact its financial performance.
Budgeting: Direct costs are an important consideration when creating a budget for a business. By accurately estimating and tracking direct costs, a business can create a realistic and achievable budget that takes into account its cost structure.
Decision making: Direct costs play a key role in decision-making, as they can help a business to determine the feasibility of new projects, investments, and other initiatives. By understanding the direct costs associated with a particular project or initiative, a business can make informed decisions about whether to pursue it, and how to allocate its resources accordingly.
The importance of indirect costs to a business
Cost control: Understanding and managing indirect costs is crucial for controlling the overall costs of a business. By keeping indirect costs as low as possible, a business can increase its margins and profitability.
Budgeting: Indirect costs are an important component of budgeting, as they represent a significant portion of a business’s total costs. By accurately estimating and tracking indirect costs, a business can create a realistic and achievable budget that takes into account its cost structure.
Decision making: Indirect costs play a role in decision-making, as they can impact the feasibility of new projects, investments, and other initiatives. By understanding the indirect costs associated with a particular project or initiative, a business can make informed decisions about whether to pursue it and how to allocate its resources accordingly.
Productivity: Indirect costs can impact a business’s productivity, as they represent the costs of supporting activities that are not directly tied to production or sales. By accurately tracking and managing indirect costs, a business can identify areas where it can improve its efficiency and reduce its costs.
the impact of costs on business decisions
Resource allocation: The costs associated with different activities and projects can impact how a business allocates its resources. For example, a business may prioritize projects with lower costs or higher margins, or allocate more resources to cost-saving initiatives.
Pricing decisions: Costs are a key factor in determining the prices that a business charges for its products or services. A business must consider its costs when setting prices to ensure that it is covering its expenses and making a profit.
Investment decisions: Costs play a role in investment decisions, as they impact the feasibility of new projects and initiatives. A business must consider the costs associated with an investment, including direct costs, indirect costs, and the opportunity cost of not pursuing other opportunities.
Expansion decisions: The costs of expanding a business can impact its decisions regarding growth and expansion
the impact of costs changing on a business and its stakeholders
If costs increase then the business will profit less meaning that the owners will make less.
If costs increase prices may increase for customers meaning they cant buy as much
If costs fall then the business may profit more leading to growth
the usefulness of cost centres to a business and its stakeholders
Improved cost control: Cost centers allow businesses to allocate costs to specific areas of the business, making it easier to identify and manage costs. This improved visibility into costs helps businesses to make better decisions about where to allocate resources and how to reduce costs.
Better decision-making: Cost centers provide important information to decision-makers, allowing them to assess the cost impact of different business initiatives. For example, a business can evaluate the cost of launching a new product line by analyzing the costs associated with its cost center.
Improved budgeting and planning: Cost centers allow businesses to set budgets for specific areas of the business, making it easier to monitor and control spending. This helps businesses to manage their resources effectively and make informed decisions about how to allocate resources to support growth and profitability.
evaluate the usefulness of profit centres to a business and its stakeholders
Improved profitability: Profit centers help businesses to identify and measure the profitability of specific areas of the business. This improved visibility into profitability helps businesses to make better decisions about how to allocate resources and grow the business.
Better decision-making: Profit centers provide important information to decision-makers, allowing them to assess the profitability impact of different business initiatives. For example, a business can evaluate the profitability of launching a new product line by analyzing the profit center associated with that product.
Improved budgeting and planning: Profit centers allow businesses to set budgets for specific areas of the business, making it easier to monitor and control spending. This helps businesses to manage their resources effectively and make informed decisions about how to allocate resources to support growth and profitability.
Full costs allocation
Cost allocation is the process of identifying, accumulating, and assigning costs to costs objects such as departments, products, programs, or a branch of a company.
Absorption cost allocation
Absorption costing allocates fixed overhead costs to a product whether or not it was sold in the period
Marginal cost allocation
Marginal cost is calculated as the total expenses required to manufacture one additional good
the usefulness of different costing methods to a business and its stakeholders
Improved cost control: Costing methods help businesses to identify, measure, and manage costs effectively. This improved visibility into costs helps businesses to make better decisions about where to allocate resources and how to reduce costs.
Better decision-making: Costing methods provide important information to decision-makers, allowing them to assess the cost impact of different business initiatives. For example, a business can use process costing to evaluate the cost of producing a specific product line.
Improved budgeting and planning: Costing methods allow businesses to set budgets for specific areas of the business, making it easier to monitor and control spending. This helps businesses to manage their resources effectively and make informed decisions about how to allocate resources to support growth and profitability.
Enhanced reporting: Costing methods provide useful information for internal and external reporting, allowing businesses to provide stakeholders with detailed and accurate information about costs
how can the allocation of costs affect a business and its stakeholders
Financial performance: The allocation of costs can impact a business’s financial performance by affecting the profitability of specific products, services, or departments. For example, if costs are allocated incorrectly, it could make a profitable product or service appear unprofitable, leading to incorrect business decisions.
Competitive advantage: Cost allocation can also impact a business’s competitiveness by affecting the prices of products and services. If costs are allocated incorrectly, this could result in prices that are too high or too low, which can impact the business’s competitiveness in the market.
Resource allocation: The allocation of costs can impact a business’s ability to allocate resources effectively. If costs are not allocated accurately, it can result in incorrect resource allocation
evaluate the profit level of a business
Gross profit margin: Gross profit margin is calculated by dividing gross profit by total revenue. Gross profit margin indicates the percentage of revenue that is left after deducting the cost of goods sold (COGS). A higher gross profit margin indicates that the business is generating more profit from its products or services.
Net profit margin: Net profit margin is calculated by dividing net profit by total revenue. Net profit margin indicates the percentage of revenue that remains after all costs, including operating expenses and taxes, have been deducted. A higher net profit margin indicates that the business is more efficient at generating profit.
Return on equity (ROE): ROE is calculated by dividing net profit by shareholders’ equity. ROE measures how effectively a business is generating profit from the investments made by its shareholders. A higher ROE indicates that the business is generating more profit for its shareholders.
Return on assets (ROA): ROA is calculated by dividing net profit by total assets. ROA measures the efficiency of a business at generating profit from its assets. A higher ROA indicates that the business is generating more profit from its assets.
Operating profit: Operating profit is calculated by subtracting operating expenses from revenue. Operating profit measures the profit generated by a business’s core operations, excluding one-time gains or losses. A higher operating profit indicates that the business is generating more profit from its core operations.
