Business Costs and Break-even Analysis

Flashcards covering key definitions, formulae, and concepts related to business costs, costing methods, and break-even analysis for Cambridge 9609 Business.

Costs

The expenses a business incurs when producing goods or providing services, such as labour, materials, equipment, and premises.

Profit Formula

$$\text{Profit} = \text{Total Revenue} - \text{Total Costs}$$

Fixed Costs

Costs that remain unchanged regardless of the level of output over a given period, such as rent, insurance, and salaries of permanent employees.

Variable Costs

Costs that change directly with the level of production or sales, such as raw materials, packaging, and fuel used in production.

Total Costs

The combined value of all fixed and variable costs incurred by a business; calculated as $\text{Total Costs} = \text{Fixed Costs} + \text{Variable Costs}$.

Average Cost (Unit Cost)

The cost of producing one single unit of output, calculated using the formula: $\text{Average Cost} = \frac{\text{Total Cost}}{\text{Number of Units Produced}}$

Economies of Scale

The phenomenon where average costs fall as production increases because fixed costs are spread over a larger number of units.

Marginal Cost

The additional cost incurred by producing one extra unit of output, calculated as: $\text{Marginal Cost} = \frac{\text{Change in Total Cost}}{\text{Change in Output}}$

Direct Costs

Costs that can be directly identified with a specific product, service, or department, such as components and direct production wages.

Indirect Costs (Overheads)

Costs that cannot be directly linked to a specific product but support the overall operation, such as office electricity, security, and administration expenses.

Cost Centre

A department, section, or activity (e.g., Marketing or HR) where costs are recorded and monitored to identify overspending and improve efficiency.

Cost Control

The process of monitoring, managing, and reducing business costs—such as improving labour productivity or reducing waste—while maintaining quality.

Break-even Analysis

A technique used to identify the level of output or sales where total revenue exactly equals total costs, resulting in no profit or loss.

Contribution per Unit

The amount each unit sold contributes towards covering fixed costs, calculated as: $\text{Contribution} = \text{Selling Price} - \text{Variable Cost per Unit}$

Break-even Output (units)

The number of units a business must sell to cover all costs: $\text{Break-even Output} = \frac{\text{Fixed Costs}}{\text{Contribution per Unit}}$

Margin of Safety

The difference between the actual level of sales and the break-even level: $\text{Margin of Safety} = \text{Actual Sales} - \text{Break-even Sales}$

Full Costing (Absorption Costing)

A method that allocates both fixed and variable costs to each unit produced, ensuring every product includes a share of all production costs.

Contribution Costing (Marginal Costing)

A costing method that includes only variable costs when calculating the cost of a product, treating fixed costs as a separate expense paid from total contribution.

Profit Centre

A department or division of a business responsible for both costs and revenues, where performance is measured by profitability rather than just cost efficiency.