Unit 16 Flashcards
Factors of classifying costs
○ Fixed costs.
○ Variable costs.
○ Total costs.
○ Average costs.
Usage of cost data.
Cost data allows a business do break-even analysis along with decisions about whether to continue or stop producing a product.
Limitations of diseconomies of scale/
If a business faces diseconomies of scale, it means the business loses control and also loses the effects of economies of scale.
Reasons for diseconomies of scale.
1)Poor communication.
2)Lack of commitment from employees
3)Weak coordination
Explain reason for diseconomies of scale: Poor communication.
Managers may no longer be able to communicate directly with employees.
Explain reason for diseconomies of scale: Lack of commitment from employees.
No longer day to day contact with employees which leads to lack of commitment and demotivated employees. This leads to higher labor turnover loss of productivity.
Explain reason for diseconomies of scale: Weak coordination
When production locations are spread out and many in number, this may lead to managers being of different departments working towards different objectives. This may result in duplication of work and increase costs due to waste.
Importance of economies of scale:
Economies of scale allows a business to reduce costs as the business grows and requires more resources and funding.
Types of economies of scale:
(1) Financial economies.
(2) Managerial economies.
(3) Marketing economies.
(4) Purchasing economies.
(5) Technical economies.
Explain economies of scale: Financial economies
Banks find it easier to lend money to bigger businesses because they see bigger businesses as low risk.
Explain economies of scale: Managerial economies
Keeping specialist managers for different tasks improves the quality of business decisions.
Explain economies of scale: Marketing economies
If total marketing costs rise as a business gets larger, they do not rise at the same rate as sales output. So if the business doubles output and sales, marketing prices will not need to be doubled.
Explain economies of scale: Purchasing economies
Buying larger quantities of supplies from suppliers means suppliers may often offer discounts on large purchases. This means small businesses cannot benefit purchasing economies.
Explain economies of scale: Technical economies
Flow production with the use of automated machines and computers. Although this has high levels of power output at lower unit costs, this can only be afforded by larger business due to the method being expensive.
Usage of break even analysis
○ Calculate amount of units needed to sell before profit is made.
○ Calculate effect on profit for increasing or decreasing product prices.
○ Calculate effect on profit for increasing and decreasing costs.
Requirements of making break-even chart:
○ Revenue at zero and maximum at output.
○ Total cost at zero and capacity output.
○ Fixed cost at zero and capacity output.
Define: Bulk-buying:
Buying from suppliers in mass quantities to make products.
Define: Margin of safety
Difference between current and break-even level of output.
Define: Break-even:
Level of output where revenue is equal to cost.
Define: Diseconomies of scale
Factors that cause average costs to rise along with scale of operations.
Define: Economies of scale:
Reductions in average cost with the increase scale of operations.
Define: Average costs:
Cost of producing a single unit.
Define: Fixed costs:
Costs that do not change with output.
Define: Variable costs:
Costs that change in direct proportion to output.
Define: Total costs:
All variable and fixed costs of producing the total output.
Formula for: Margin of safety =
(actual sales - break-even output)
Formula for: Total variable cost =
=units x per unit variable
Formula for: Average cost =
total cost / unit produced
Formula for: Total cost =
fixed cost + variable cost
