S-Cool Revision Summary

S-Cool Revision Summary

Average rate of return (ARR)

This is an investment appraisal technique which calculates the average annual profit of an investment project, expressed as a percentage of the sum of money invested.

Break-even chart

This is a graph showing the total revenue and the total costs of a business at various levels of output. It is a form of Management Accounting and it enables a manager to see the expected profit or loss that a product will face at different levels of output.

Break-even point

This refers to the point on a break-even chart where the total revenue (T.R) of a business (or product) is equal to its total costs (T.C). It can also be calculated mathematically by using the following formula :

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Budget

This is a financial plan for the forthcoming year, that is drawn up to help a business achieve its objectives. It covers aspects such as sales, production expenses, etc.

Budgetary control

This refers to the system of regular comparison of budgeted figures (for revenue and expenses) with the actual outcomes. Any differences between the budgeted figures and the actual outcomes are known as variances - these need to be investigated and the reasons for their existence must be established. 

Contribution

This is total revenue minus total variable costs. The remaining figure is called 'contribution' because it contributes towards covering fixed costs and, once these are covered, it contributes towards profit.

Contribution per unit

This is the amount of money that each unit that is sold contributes towards covering the fixed costs of the business. Once the fixed costs are covered, all extra contribution is profit.

Cost centre

This is a department or a division of a business to which certain costs can be allocated (e.g. wages and salaries, telephone bills, etc).

Direct cost

This is a cost which can be attributed to the production of a product, and it will vary in direct proportion to output (e.g. raw materials and wages of production workers).

Discounted cash flow (DCF)

This is an investment appraisal technique which discounts the monies that the business will receive in future years from a certain investment project, in order to give a present-day value for each year's return.

Fixed costs

These are costs which do not vary with output, and would be incurred even when output was zero (e.g. rent, loan repayments, salaries).

Fixed costs per unit

These are total fixed costs divided by the number of units produced. They are often referred to as average fixed costs.

Indirect cost

This is a cost which is not directly attributable to production (e.g. managers' salaries, mortgage payments, or rent). These costs are often referred to as 'overheads'.

Indirect labour

These are those employees such as office and cleaning staff who are not involved directly in the process of production or customer service.

Net present value (NPV)

This is an investment appraisal technique which calculates the total of all the years' discounted cash flows, minus the initial cost of the investment project. If the resulting figure (the NPV) is positive, then the project is viable and should be undertaken.

Payback period

This is an investment appraisal technique which estimates the length of time that it will take to recoup the initial cash outflow of an investment project.

Profit

This is the amount of revenue that remains for a business or a product, after all costs have been deducted (i.e. profit = total revenue - total costs).

Profit centre

This is a department or a division within a business which operates independently and produces its own annual profit and loss account.

Safety margin

This is the number of units of output that the business produces above its break-even point. It represents the number of units that the production level could decrease by, before the business would make a loss. It is calculated by the formula :

Margin of safety = Current output level - Break-even output level.

Variable cost

This is a cost which varies directly with the number of units that the business produces (e.g. raw materials, wages of production workers, and electricity bills). In other words, as the level of output increases, then so too will the variable costs that the business has to pay.

Variable cost per unit

These are the total variable costs divided by the number of units produced. They are often referred to as average variable costs.

Variance

This is the difference between the actual results of the business and the figures that the business budgeted for the year (e.g. sales, wages, advertising costs, etc). Positive (i.e. favourable) variances occur where the actual amount of money flowing into the business is more than the budgeted figure, or where the actual amount of money flowing out of the business is less than the budgeted figure. Negative (i.e. unfavourable) variances occur where the actual amount of money flowing into the business is less than the budgeted figure, or where the actual amount of money flowing out of the business is more than the budgeted figure.

Zero budgeting

This is where a budget is set to zero for a given time-period, and the manager of the particular division or department then has to justify any expenditure which he wishes to make. It is often used in an economic recession or a downturn in the industry, when money is not as readily available.