Costs , revenue and profit

Question 1

What are all the costs a business can have ?

Answer 1

Fixed costs
Stepped fixed costs
Variable costs
Total costs
Unit / average cost
Marginal costs
Social costs
Opportunity costs

Question 2

What are fixed costs ?

Answer 2

Costs that do not change with output / Usually paid on a regular basis

Question 3

What are stepped fixed costs ?

Answer 3

Fixed costs that increase in the short term E.g if production goes up then FC may go up for machinery

Question 4

What are variable costs ?

Answer 4

Costs that vary with output - more you produce the more your VC goes up

Question 5

What are total costs ?

Answer 5

Fixed costs added with the variable costs

Question 6

What are unit costs ?

Answer 6

Total costs divided by the output in units or revenue divided by the total units sold

Question 7

What are marginal costs ?

Answer 7

Cost of producing one extra unit - the increase in the VC for producing one more unit

Question 8

What are social costs ?

Answer 8

Costs that society bares

Question 9

What is opportunity costs ?

Answer 9

What the business could’ve spent their money on

Question 10

What is revenue ?

Answer 10

Money that comes into the business

Question 11

Average revenue ?

Answer 11

TOTAL REV / SALES N.O

Question 12

What is standard costing ?

Answer 12

The cost from making a product and the process of making it

Question 13

What are the advantages of standard costing ?

Answer 13

Gives a business an aim to try and achieve
Workers can look for better and efficient ways to do a job
Gives workers a target to aim for

Question 14

What are the disadvantages of standard costing ?

Answer 14

Collecting info to arrive at standard costing can be time consuming
If linked to workers bonus schemes , work may be poor to reduce costs ( corner cutting )
If figures are not reassessed then they may become inaccurate

Question 15

What are cost centres ?

Answer 15

Certain areas of the business can have costs identified and allocated to it

Question 16

What are some of the ways costs can be allocated to Cost centres by a business ?

Answer 16

Products being produced
Individual departments
Location ( what areas are using the most )
Capital employed ( machinery )
Physical department space used

Question 17

What are the benefits of cost centres ?

Answer 17

Shows what departments are doing well ( if not they make changes )
Can use information to motivate workers ( not give bonus drives them to earn it )
Can use info to get cheaper materials or improve production process

Question 18

What are the disadvantages of cost centres ?

Answer 18

Lead to lack of motivation
Time consuming to collect info
Some costs may be out of control
May have conflicts between departments

Question 19

What are profit centres ?

Answer 19

Profits are assigned to different areas of a business

Management sees what areas are profitable or not ( methods of allocating costs can be used )

Question 20

What is absorption costing ?

Answer 20

All indirect costs are absorbed by different cost centres E.G Different departments within a project creating a watch / car

Use output of each unit or its proportion of direct costs to allocate overheads

Other method is to use full costing taking total overheads and divide them up based on criteria as this may be costly and time consuming for a large organisation

Question 21

What are the disadvantages of absorption costing ?

Answer 21

Expensive and time-consuming in a large organisation

Info could be old and out of date

Question 22

How useful are costing methods for stakeholders ?

Answer 22

Management - decisions made on basis of costing / reputation

Banks - Looks at the level of profit / ability to pay loans back

Shareholders - They look at the bottom line for dividends and profits