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Paper 2 > Theme 2 > Flashcards

Theme 2 Flashcards

1
Q

Contribution per unit

A

Selling price - variable cost

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2
Q

Total contribution

A

Revenue - total variable costs

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3
Q

Contribution definition

A

The amount of money left over after variable costs have been taken from revenue. The money contributes to fixed costs and profit.

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4
Q

BE point

A

Where total revenue and total costs are the same

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5
Q

Break even output

A

Fixed costs/contribution

The output a business needs to produce so total revenue and costs are the same

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6
Q

Margin of safety

A

The range of output between break even level and the current level of output, over which a profit is made

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7
Q

Why usebreak even analysis

A

Used to make decisions about the future, answers ‘what if’ questions

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8
Q

Limitations of BE analysis

A 
>unchanging conditions
>assumes all output is sold 
>assumes total cost and total rev lines are straight 
>some fixed costs may change 
>relies on quality and accuracy of data
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9
Q

Budget definition

A

Quantitative plan agreed/prepared in advance. A budget is what the firm want to happen, based on past trading records.

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10
Q

Name 6 Purposes of a budget

A 
>Motivation
>communication
>co-ordination
>Efficiency
>Planning 
>Control
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11
Q

Sales budget

A

Planned sales for a future period of time - can be in terms of volume or revenue

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12
Q

Production cost budgeting

A

Planned production cost for a future period of time

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13
Q

Zero based budgeting

A

Where no money is allocated for costs/spending unless it can be justified by the fund holder

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14
Q

Variance analysis

A

Finding reasons for the difference between actual figure and expected financial outcome

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15
Q

Favourable variance

A

Actual figures are better than predicted/budgeted figures

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16
Q

Adverse variance

A

Actual figures are worse than predicted/budgeted figures

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17
Q

Difficulties of budgeting

A 
>figures aren’t actual figures
>if sales data is inaccurate budgets will be inexact
>setting of budgets may lead to conflict
>opportunity costs
>over ambitious will cause problems
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18
Q

Gross profit

A

Revenue - cost of sales

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19
Q

Operating profit

A

Gross profit - overheads (operating costs)

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20
Q

Net profit

A

Operating profit - interest and exceptional costs

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21
Q

Gross profit margin (GPM)

A

Gross profit / revenue * 100%

22
Q

Operating profit margin (OPM)

A

Operating profit / revenue * 100%

23
Q

Net profit margin

A

Net profit / revenue * 100%

24
Q

Ways to improve profitability

A

> raising prices
lowering costs
~buying cheaper resources
~using resources more efficiently

25
Q

Liquidity

A

Is the ease with which a assets can be converted to cash

26
Q

Assets

A

Resources that belong to a business

27
Q

Current assets

A

Are assets that will be changed to cash within 12 months

28
Q

Non current assets

A

Are long term resources that will be used repeatedly by the business over a period of time

29
Q

Liabilities

A

The debts of the business

30
Q

Current liabilities

A

Money owed that must be paid within 1 year

31
Q

Non current liabilities

A

Long term loans and any other money owed that doesn’t have to be paid back for over at least 1 year

32
Q

Capital

A

The money put into the business by owners

33
Q

Net assets

A

Total assets - total liabilities

34
Q

Shareholders equity

A

Summary of what is owed to the owners of the business

35
Q

Current ratio

A

Current assets / current liabilities

36
Q

current ratios analysis

A

1.5:1 to 2:1 is good
Below 1.5:1 could be argued a business doesn’t have enough working capital.
Some business can work at 1:1 that sell quickly.
Operating at 2:1 may mean that have too much money tied up in stock

37
Q

Acid test ratio

A

(Current assets - inventories) / current liabilities

38
Q

Acid test ratio analysis

A

A more severe test of liquidity.
1:1 may mean their assets - stocks cannot cover liabilities.
Some businesses can deal with this as they sell products quickly

39
Q

Working capital

A

Current assets - current liabilities

The funds left over to meet day to day expenses after current debts have been paid

40
Q

Managing working capital

Different businesses will have different working capital needs, depending on:

A

> the size of the business
stock levels
debtors and creditors
maintaining adequate levels of working capital

41
Q

Importance of cash

A

Cash is vital to a business, without it they might fail

42
Q

Ways to improve liquidity

A 
>only make essential purchases 
>sales and leasebacks 
>use of overdrafts
>negotiate short or long term loans w bank
>extend credit with suppliers
43
Q

Capacity utilisation

A

Is about the use that’s business makes of it resources

44
Q

Capacity utilisation formula

A

Current output/maximum possible output *100

45
Q

Under utilisation

A

The position where a business is producing at less than full capacity

46
Q

Drawbacks of under utilisation

A

> not be making the most of resources
operating inefficiently as unit costs aren’t minimised
may affect morale of workers

47
Q

Benefits of under utilisation

A

> Cope more easily with sudden rises in demand
less work related stress
reduce sickness and absenteeism

48
Q

Over utilisation

A

Where a business is operating at full capacity and draining resources

49
Q

Drawbacks of over utilisation

A 
>strain on resources
>causing stress leading to absenteeism 
>machines may be overused to break point
>may not cope with increase in demand 
>insufficient time for staff training
50
Q

Benefits of over utilisation

A

> average costs are lower as fixed costs are spread over more units
more staff motivation as they feel secure
busy operation improves business image

51
Q

Ways of improving capacity utilisation

A

> increase usage
increase sales
outsourcing
reduce capacity

Paper 2 (2 decks)

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