Costs, Revenue and Profit Flashcards
(33 cards)
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
