Financial Planning Flashcards
What is a fixed cost?
A cost which doesn’t change with the output of the business.
What is a variable cost?
Costs connected to the output of the business
What is revenue?
The total income that a business receives from the sales of its outputs
What is the calculation for total cost?
Fixed costs + Variable costs
What is the calculation for revenue?
selling price X units sold
What is the calculation for profit?
Revenue - costs
What is the calculation for break even?
fixed costs / contribution per unit
What is the calculation for contribution?
selling price - variable cost per unit
What is the calculation for total contribution?
Total sales - total variable costs
What is the calculation for Margins of safety?
Planned output - break even output
What are the positives of breakeven? (3)
Impact of cost changes can be seen which help the business make decisions
Allows business to estimate the future level of output they will need to break even & hit a profit
Impact of price changes can be seen on profit
What are the drawbacks of breakeven? (4)
A business rarely charge same price for all products
Variable costs aren’t always constant, should TC line curve?
The output isn’t always sold at a constant price
A business may have a wide product range
What is favourable budgeting?
Underspending
What is adverse budgeting?
Overspending
What is a budget?
A financial plan for the future concerning the revenues and costs of a business
What is historical budgeting?
Uses last years figures as the basis for its budget
Benefits of historical budgeting?
Realistic as it uses actual results
Drawbacks of historical budgeting?
Circumstances may have changed
Doesn’t encourage efficiency
What is zero budgeting?
Budgeted costs and revenues to be set at 0
Benefits of zero budgeting?
Budgets are based on new prospects for sales and costs which are more realistic
Drawbacks of zero budgeting?
More complicated and time consuming
What is the calculation for profit variance?
expenses - budget
What is a positive variance?
Actual result is better than budget
What is a negative variance?
Actual result is worse than budget
