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Flashcards in Things I need to know for the exam! Deck (11):

Start up costs vs running costs

Start up costs are what you get the business starting and are only paid out at the beginning of the business's lifetime. Examples include: Equipment, an advert three weeks before it opens and deposit for the premises.

Running costs are costs that are need to be paid during the business's lifetime. Examples include: electricity to run the business, refunds and rental cost.


Fixed costs vs Variable costs

Fixed costs always need to be paid no matter how much the business makes, examples include insurance, electricity and salaries.

Variable costs, on the other hand, change depending on the business's output, examples include tax, materials, supplies and staff wages.


Direct vs Indirect costs

Direct costs are any costs that can be directly linked to the product. Examples are raw materials and labour (work hours) used to make it.

Indirect costs (overheads) are costs which are needed for the business to operate but not directly linked to the product. Examples are advertising, furniture and cleaning materials.


Total costs (what they are and the formula to work them out)

Total costs are anything that the business spends money on, fixed or variable.
Total costs = fixed costs + variable costs



Revenue is the income coming into the business from sales, through a grant, the leasing of premises or interest on money in the bank.
Revenue = Selling price x number of products sold


Calculating profit and loss

Profit is the money left over when you subtract your costs from your total revenue.
Profit = Revenue - total costs


Margin of safety - What is it? Why is it important? What does it look like on the graph?

The margin of safety is the difference between the actual level of output and the break-even output. In other words, all revenue above the break-even point is the margin of safety.
It is important because it lets the management know that the business is making profit and usually the higher the MOS the more stable the business is.


How do you work out gross profit?

Gross profit = Revenue - Cost of sales


How do you work out net profit?

Net profit = Revenue - Total costs


What is the definition of budgeting?

An expenditure budget is how much the business plans to spend and what on. Revenue budget is how the business expects to make from revenue.


What could a business do if it wasn't breaking even?

1, Reduce wages of staff.
2. Reduce number of staff.
3. Host sales.
4. Offer more sizes (if it is a clothes shop).