AQA AG Business- U1-AO2.1 Costs and Revenue

What are fixed costs?

• Costs that vary with the level of production

• Costs that remain constant regardless of the level of production

• Costs that change with the number of units sold

• Costs that are incurred only when production exceeds a certain level

Answer explanation

Fixed costs are expenses that do not change with the level of production. They remain constant regardless of how much is produced, unlike variable costs, which fluctuate with production levels.

Which of the following is an example of a fixed cost?

• Raw materials

• Electricity bills

• Rent for factory premises

• Wages for hourly workers

Answer explanation

Rent for factory premises is a fixed cost because it remains constant regardless of production levels, unlike raw materials, electricity bills, and wages for hourly workers, which vary with activity.

What characterises variable costs?

• They remain constant regardless of production levels

• They change in direct proportion to the level of production

• They are incurred only at the start of production

• They are fixed for a certain period

Answer explanation

Variable costs change in direct proportion to the level of production, meaning as production increases, these costs also increase. This distinguishes them from fixed costs, which remain constant regardless of production levels.

Which of the following is a variable cost?

• Salaries of permanent staff

• Depreciation of machinery

• Cost of raw materials

• Insurance premiums

Answer explanation

The cost of raw materials varies with production levels, making it a variable cost. In contrast, salaries, depreciation, and insurance are fixed costs that do not change with production volume.

What are semi-variable costs?

• Costs that are entirely fixed

• Costs that are entirely variable

• Costs that have both fixed and variable components

• Costs that do not exist in real business scenarios

Answer explanation

Semi-variable costs are expenses that contain both fixed and variable components. This means they have a base cost that remains constant, along with additional costs that vary with production or activity levels.

Which of the following is an example of a semi-variable cost?

• Rent

• Direct labour costs

• Telephone bills with a fixed line rental and variable call charges

• Office supplies

Answer explanation

A semi-variable cost has both fixed and variable components. Telephone bills with a fixed line rental and variable call charges exemplify this, as they include a constant fee plus charges that vary based on usage.

How is total revenue calculated?

• Fixed costs + Variable costs

• Price per unit x Quantity sold

• Total costs - Profit

• Capital expenditure + Operating expenditure

Answer explanation

Total revenue is calculated by multiplying the price per unit by the quantity sold. This formula directly reflects the income generated from sales, making it the correct choice.

What is the main difference between revenue and capital expenditure?

• Revenue expenditure is for long-term assets, capital expenditure is for short-term expenses

• Revenue expenditure is for short-term expenses, capital expenditure is for long-term assets

• Revenue expenditure is always higher than capital expenditure

• Capital expenditure is always higher than revenue expenditure

Answer explanation

The correct choice states that revenue expenditure is for short-term expenses, while capital expenditure is for long-term assets. This distinction is crucial for understanding how businesses allocate their financial resources.

Which of the following is considered a capital expenditure?

• Office supplies

• Purchase of machinery

• Utility bills

• Salaries

Answer explanation

Capital expenditures are long-term investments in assets. The purchase of machinery qualifies as a capital expenditure because it is a significant investment that will benefit the company over several years, unlike office supplies or utility bills.

Which of the following is considered a revenue expenditure?

• Building a new factory

• Buying a new delivery van

• Paying for advertising

• Purchasing land

Answer explanation

Revenue expenditures are costs that are incurred for the day-to-day functioning of a business. Paying for advertising is a revenue expenditure as it directly relates to promoting sales, unlike the other options which are capital expenditures.