Costs, Revenue and Profit

Question 1

How is a unit cost calculated?

Answer 1

Total cost / output

Question 2

How is a marginal cost calculated?

Answer 2

change in total cost / change in quantity

Question 3

How is profit calculated?

Answer 3

Revenue - costs

Question 4

What is profit?

Answer 4

It is the surplus of the value of sales made by a business over its total costs of production.

Question 5

Why is profit important?

Answer 5

• To measure business performance
• To provide further finance for the business
• To show to banks and lenders when raising finance
• To reward entrepreneurs and shareholders

Question 6

How is revenue calculated?

Answer 6

Selling price x number of units sold

Question 7

How is revenue increased?

Answer 7

By selling more products or increasing the price of products sold

Question 8

Why can altering selling price damage revenue?

Answer 8

Because some customers are very elastic to changes in the prices of some products and will purchase other products if the price is changed

Question 9

What are fixed costs?

Answer 9

Costs that do not vary with the level of output

Question 10

What are overheads/indirect costs?

Answer 10

Costs that can not be attributed to a particular unit of output

Question 11

What are direct costs?

Answer 11

Costs that are directly attributable to a unit output

Question 12

What are variable costs?

Answer 12

Costs that change in proportion to the level of goods or services a business produces

Question 13

What are stepped fixed costs?

Answer 13

Costs that are fixed in the short term, when costs increase due to business activity exceeding a certain level e.g buying new machinery

Question 14

What is marginal cost?

Answer 14

The cost of producing one additional unit

Question 15

What is social cost?

Answer 15

Costs that are significant to stakeholders; e.g negative impacts of the product sold: alcohol - liver damage

Question 16

What is opportunity cost?

Answer 16

Related to what a business could have spent money on, the cost of the next best alternative that had to be given up in order to spend money on the chosen option

Question 17

What is a cost centre?

Answer 17

Part of a business where costs can be calculated and controlled

Question 18

What is a profit centre?

Answer 18

Part of a business where costs and revenue can be calculated and controlled

Question 19

What do profit centres allow a business to do in terms of performance?

Answer 19

To work out which areas of the business are working efficiently and which are not and why

Question 20

How do profit centres allow costs to be controlled?

Answer 20

Because managers can be more aware of the financial consequences of their actions e.g change suppliers

Question 21

How do profit centres motivate managers?

Answer 21

They gain more responsibility as it is clear if their centre is performing well or not so they try and be more efficient

Question 22

Why do profit centres add training costs?

Answer 22

Because control is passed down the heirachy so training is needed

Question 23

Why might resistance occur if profit centres are new?

Answer 23

Because change isn’t usually liked by employees

Question 24

What sort of businesses don’t benefit from profit centres?

Answer 24

Single product businesses or those with centralised control

Question 25

What factors affect profit centres?

Answer 25

• Whether staff have sufficient training
• The type of leadership
• The type of business
• The costs of setting one up

Question 26

Why is it important for a firm to understand costs?

Answer 26

• To help budget and then stick to it

- To ensure that you’re actually going to make a profit

Question 27

What is contribution costing?

Answer 27

Variable cost per unit + contribution = selling price

Question 28

When is contribution costing appropriate?

Answer 28

When a company produces a large number of different products and it is too difficult and time consuming to allocate fixed costs

Question 29

When is contribution costing not good?

Answer 29

When sellng price is less than the variable cost it shouldn’t be used

Question 30

What is absorption costing?

Answer 30

Tries to allocate fixed and variable costs to products being produced in a fair way so costs and profitability can be measured

Question 31

What are the risks of absorption costing?

Answer 31

• Allocation of investment chanelled to the wrong profit centre if profits are overestimated
• Discontinuation of products or outlets closed when in fact they were adding to profits

Question 32

How can the risks of absorption costing be reduced?

Answer 32

As long as profit centres are making a contribution to over all overhards, production should continue at least in the short term

Question 33

What is standard costing?

Answer 33

A standard cost is a planned cost for producing a good or service