Costs , revenue and profit Flashcards
What are all the costs a business can have ?
Fixed costs
Stepped fixed costs
Variable costs
Total costs
Unit / average cost
Marginal costs
Social costs
Opportunity costs
What are fixed costs ?
Costs that do not change with output / Usually paid on a regular basis
What are stepped fixed costs ?
Fixed costs that increase in the short term E.g if production goes up then FC may go up for machinery
What are variable costs ?
Costs that vary with output - more you produce the more your VC goes up
What are total costs ?
Fixed costs added with the variable costs
What are unit costs ?
Total costs divided by the output in units or revenue divided by the total units sold
What are marginal costs ?
Cost of producing one extra unit - the increase in the VC for producing one more unit
What are social costs ?
Costs that society bares
What is opportunity costs ?
What the business could’ve spent their money on
What is revenue ?
Money that comes into the business
Average revenue ?
TOTAL REV / SALES N.O
What is standard costing ?
The cost from making a product and the process of making it
What are the advantages of standard costing ?
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
What are the disadvantages of standard costing ?
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
What are cost centres ?
Certain areas of the business can have costs identified and allocated to it
What are some of the ways costs can be allocated to Cost centres by a business ?
Products being produced
Individual departments
Location ( what areas are using the most )
Capital employed ( machinery )
Physical department space used
What are the benefits of cost centres ?
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
What are the disadvantages of cost centres ?
Lead to lack of motivation
Time consuming to collect info
Some costs may be out of control
May have conflicts between departments
What are profit centres ?
Profits are assigned to different areas of a business
Management sees what areas are profitable or not ( methods of allocating costs can be used )
What is absorption costing ?
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
What are the disadvantages of absorption costing ?
Expensive and time-consuming in a large organisation
Info could be old and out of date
How useful are costing methods for stakeholders ?
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
