Costs, Revenue and Profit Flashcards
How is a unit cost calculated?
Total cost / output
How is a marginal cost calculated?
change in total cost / change in quantity
How is profit calculated?
Revenue - costs
What is profit?
It is the surplus of the value of sales made by a business over its total costs of production.
Why is profit important?
- 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
How is revenue calculated?
Selling price x number of units sold
How is revenue increased?
By selling more products or increasing the price of products sold
Why can altering selling price damage revenue?
Because some customers are very elastic to changes in the prices of some products and will purchase other products if the price is changed
What are fixed costs?
Costs that do not vary with the level of output
What are overheads/indirect costs?
Costs that can not be attributed to a particular unit of output
What are direct costs?
Costs that are directly attributable to a unit output
What are variable costs?
Costs that change in proportion to the level of goods or services a business produces
What are stepped fixed costs?
Costs that are fixed in the short term, when costs increase due to business activity exceeding a certain level e.g buying new machinery
What is marginal cost?
The cost of producing one additional unit
What is social cost?
Costs that are significant to stakeholders; e.g negative impacts of the product sold: alcohol - liver damage
What is opportunity cost?
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
What is a cost centre?
Part of a business where costs can be calculated and controlled
What is a profit centre?
Part of a business where costs and revenue can be calculated and controlled
What do profit centres allow a business to do in terms of performance?
To work out which areas of the business are working efficiently and which are not and why
How do profit centres allow costs to be controlled?
Because managers can be more aware of the financial consequences of their actions e.g change suppliers
How do profit centres motivate managers?
They gain more responsibility as it is clear if their centre is performing well or not so they try and be more efficient
Why do profit centres add training costs?
Because control is passed down the heirachy so training is needed
Why might resistance occur if profit centres are new?
Because change isn’t usually liked by employees
What sort of businesses don’t benefit from profit centres?
Single product businesses or those with centralised control
What factors affect profit centres?
- Whether staff have sufficient training
- The type of leadership
- The type of business
- The costs of setting one up
Why is it important for a firm to understand costs?
- To help budget and then stick to it
- To ensure that you’re actually going to make a profit
What is contribution costing?
Variable cost per unit + contribution = selling price
When is contribution costing appropriate?
When a company produces a large number of different products and it is too difficult and time consuming to allocate fixed costs
When is contribution costing not good?
When sellng price is less than the variable cost it shouldn’t be used
What is absorption costing?
Tries to allocate fixed and variable costs to products being produced in a fair way so costs and profitability can be measured
What are the risks of absorption costing?
- 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
How can the risks of absorption costing be reduced?
As long as profit centres are making a contribution to over all overhards, production should continue at least in the short term
What is standard costing?
A standard cost is a planned cost for producing a good or service
