Definitions 2.2

Question 1

Contribution

Answer 1

this is total revenue less variable costs. The calculation of contributions useful for businesses that are responsible for a range of products

Question 2

Margin of safety

Answer 2

the amount by which current output exceeds the level of output necessary to break even

Question 3

Adverse variance

Answer 3

a difference between budgeted and actual figures that is damaging to the firms profit (e.g. costs up or revenue down)

Question 4

Criteria

Answer 4

yardsticks against which success (or lack of it) can be measured

Question 5

Expenditure budget

Answer 5

setting a maximum figure on what a department or manager can spend over a period of time; this is to control costs

Question 6

Favourable variance

Answer 6

a difference between budgeted and actual figures that boosts a firm’s profit

Question 7

Income budget

Answer 7

setting a minimum figure for the revenue to be generated by a product, a department or a manager

Question 8

Zero budgeting

Answer 8

setting all future budgets at £0, to force managers to have to justify the spending levels they say they needed in the future

Question 9

Corporation tax

Answer 9

a levy on the incomes of companies, i.e. you pay a percentage of your pre-tax profits

Question 10

Dividends

Answer 10

annual payments made to shareholders

Question 11

Fixed overheads

Answer 11

the indirect costs that have to be paid however the business is performing e.g. rent and salaries

Question 12

Contingency finance

Answer 12

planning for the unexpected by either keeping a cash cushion in the firms current account or keeping an overdraft facility little-used

Question 13

Credit period

Answer 13

the length of time a supplier allows a buyer to wait before paying, e.g. 60 days after the bill has been sent

Question 14

Liquidation

Answer 14

closing the business down by selling off all the assets, paying debt and returning what is left ot the shareholders

Question 15

Liquidity

Answer 15

the ability of a business to pay its bills on time, which all depends upon having enough cash in the bank

Question 16

Working capital cycle

Answer 16

how long it takes for a complete cycle from cash out (buying stock) to cash back in from the customer payment. It could very from one day (for example, for fruit and veg stall) to one year (for example, a house builder)

Question 17

Administration

Answer 17

when the directors of a business feel forced by the threat of insolvency to hand over management control to an administrator (usually an accountant), who may try and sell the business, or perhaps close it down and sell off the assets

Question 18

Business model

Answer 18

the underlying plan of how the business is going to make a profit in the long term

Question 19

Enterprise resource planning (ERP)

Answer 19

planning that logs all of a firms costs, working methods and resources within a piece of software; this provides a model of the business that can be answered with questions such as “when do we need to start working to get stocks made in time for delivery before Christmas?”

Question 20

Supply chain

Answer 20

the whole path from suppliers of raw materials through production and storage on to customer delivery

Question 21

Barrier to entry

Answer 21

factors that make it hard for new firms to break into existing markets - for example, strong brand loyalty to the current market leaders

Question 22

GDP

Answer 22

gross domestic product is the vale of all the goods and services provided in one year

Question 23

Job enrichment

Answer 23

giving people the opportunity to use their ability

Question 24

Lean production

Answer 24

focusing on minimising wastage of resources throughout the supply process e.g. minimum stock levels and minimum wastage through poor quality

Question 25

Downtime

Answer 25

any period when machinery is not being used in production; some downtime is necessary for maintenance, but too much may suggest incompetence

Question 26

Excess capacity

Answer 26

when there is more capacity then justified by current demand (that is, utilisation is low)

Question 27

Rationalisation

Answer 27

reorganising in order to increase efficiency. This often implies cutting capacity to increase the percentage utilisation

Question 28

Subcontracting

Answer 28

where another business is used to perform or supply certain aspects of a firms operation

Question 29

Buffer stock

Answer 29

the desired minimum stock level held by a firm just in case something goes wrong

Question 30

Competitive advantage

Answer 30

a feature that gives one business an edge over its rivals