Unit 3-4 Flashcards
(51 cards)
Expenditure vs costs
Expenditure is a cash outflow when you buy something into the business. If these things are then used within a certain period, this will also be a cost for the period.
Two significances about costs:
- Economic significance = informs about quantities and prices.
- Accounting significance = shows consumption and depreciations in a period.
Goal of the company:
A rational economic goal is to maximize profits.
Profit=
Total Revenue - Total Costs.
Value vs Price vs Costs
Value is associated with the customers subjective perception of the product. Related to the idea of willingness to pay.
Cost is what the product cost to produce and Price will be somewhere in the middle. Cannot charge more than the consumer is willing to pay and must at the same time cover the costs.
Opportunity cost:
The loss of revenues that the second best option of your resources could have brought into the business.
Direct vs indirect costs:
Direct costs are directly related to the production process and can be attached to a specific output, whereas the indirect costs are overhead costs that are more of an organizational type.
Four different costs based on their variability:
- Fixed costs: do not vary with production. Can be inevitable like loans but also avoidable like ads.
- Variable costs: vary with production.
- Semi-fixed costs: different levels of FC depending on production level. (steps)
- Semi-variable costs: a part of FC plus a variable part, ex subscription.
Break even point (BEP)
The level of production that equalizes the TC and TR so that profits are zero. The point where the margin covers the fixed costs, from this point you start making profits.
4 ways of expressing BEP:
- Physical terms, unit sold.
- Sales volume, in monetary.
- Capacity utilization, as a percentage of max capacity.
- Time, when on the year you start making profits.
BEP in q
q = CF/(p-VCu)
How can BEP be reduced?
In the equation it is easy to see that if you lower your FC, higher the P or lower the unit variable cost - the BEP will be reduced.
Contribution margin
Simply the P-VCu, so what every unit sold will contribute with.
Safety margin
= Expected sales - BEP.
Economies of scale
Those companies with a large portion of FC so that if the company increases its production the average cost/unit cost will decrease.
Three parts of the Hoover’s principle:
a) Multiple principle
b) Reserves accumulation principle
c) Wholesale operations principle
Multiple principle
This introduces the concept of idling costs as it deals with the costs of not using the maximum capacity of the FC.
Idling costs=
The portion of the FC that the company bears which are not related to production. The opposite is the utilization cost.
Solving the idling cost with the multiple principle
With the least common multiple to reach full capacity. So if one machine can produce 100, another 200, 300 and the fourth 500 you must have a production of q=3000. This requires 30, 15, 10 and 6 machines of the different types.
Reserves accumulation principle
Companies need some kind of stock to meet unexpectedly high demand - both raw materials and finished products. This proportion is smaller in large companies.
Wholesale operations principle
Doing the wholesale in addition the only doing the production you will reduce your cost per unit of FC. Also the experience curve (learning curve) says that the time of producing will be reduced.
Operating Leverage:
A measure of how the variation in sales affect the variation in profits. It is based in the relation between FC and VC. The bigger the FC, the bigger the leverage of sales till be.
DOL =
(p-CVu)q divided by (p-CVu)q - FC
Coverage coefficient
CC = (p-CVu) /p
This is a measure of the speed at which FC are recovered.
