In the UK currently (as at 2005/06) the general corporation tax rate is 30% of taxable profits per annum, but there is also a smaller companies’ corporation tax. No tax is payable on taxable profits up to £10,000 per annum and 19% on taxable profits over £10,000 up to a maximum of £300,000 per annum. See TAXATION, FISCAL POLICY, RETAINED PROFIT.
correlation a statistical term that describes the degree of association between two variables. When two variables tend to change together, then they are said to be correlated, and the extent to which they are correlated is measured by means of the CORRELATION COEFFICIENT.
correlation coefficient a statistical term (usually denoted by r) that measures the strength of the association between two variables.
Where two variables are completely unrelated, then their correlation coeffcient will be zero; where two variables are perfectly related, then their correlation would be one. A high correlation coefficient between two variables merely indicates that the two generally vary together – it does not imply causality in the sense of changes in one variable causing changes in the other.
Where high values of one variable are associated with high values of the other (and vice-versa), then they are said to be positively correlated. Where high values of one variable are associated with low values of the other (and vice-versa), then they are said to be negatively correlated. Thus correlation coefficients can range from +1 for perfect positive association to –1 for perfect negative association, with zero representing the case where there is no association between the two.
The correlation coefficient also serves to measure the goodness of fit of a regression line (see REGRESSION ANALYSIS) which has been fitted to a set of sample observations by the technique of ordinary least squares. A large positive correlation coefficient will be found when the regression line slopes upward from left to right and fits closely with the observations; a large negative correlation coefficient will be found when the regression line slopes downward from left to right and closely matches the observations. Where the regression equation contains two (or more) independent variables, a multiple correlation coefficient can be used to measure how closely the three-dimensional plane, representing the multiple regression equation, fits the set of data points.
corset see SPECIAL DEPOSITS.
cost the payments (both EXPLICIT COSTS and IMPLICIT COSTS) incurred by a firm in producing its output. See TOTAL COST, AVERAGE COST, MARGINAL COST, PRODUCTION COST, SELLING COST.
cost-based pricing pricing methods that determine the PRICE of a product on the basis of its production, distribution and marketing costs. See AVERAGE-COST PRICING, FULL-COST PRICING, MARGINAL-COST PRICING.
cost-benefit analysis a technique for enumerating and evaluating the total SOCIAL COSTS and total social benefits associated with an economic project. Cost-benefit analysis is generally used by public agencies when evaluating large-scale public INVESTMENT projects, such as major new motorways or rail lines, in order to assess the welfare or net social benefits that will accrue to the nation from these projects. This generally involves the sponsoring bodies taking a broader and longer-term view of a project than would a commercial organization concentrating on project profitability alone.
The main principles of cost-benefit are encompassed within four key questions:
(a) which costs and which benefits are to be included. All costs and benefits should be enumerated and ranked according to their remoteness from the main purpose of the project so that more remote costs and benefits might be excluded. This requires careful definition of the project and estimation of project life, and consideration of EXTERNALITIES and SECONDARY BENEFITS;
(b) how these costs and benefits are to be valued. The values placed on costs and benefits should pay attention to likely changes in relative prices but not the general price level, since the general price level prevailing in the initial year should be taken as the base level. Although market prices are normally used to value costs and benefits, difficulties arise when investment projects are so large that they significantly affect prices, when monopoly elements distort relative prices, when taxes artificially inflate the resource costs of inputs, and when significant unemployment of labour or other resources means that labour or other resource prices overstate the social costs of using those inputs that are in excess supply. In such cases, SHADOW PRICES may be needed for costs and benefits. In addition, there are particular problems of establishing prices for INTANGIBLE PRODUCTS and COLLECTIVE PRODUCTS;
(c) the interest rate at which costs and benefits are to be discounted. This requires consideration of the extent to which social time preference will dictate a lower DISCOUNT RATE than private time preference because social time preference discounts the future less heavily and OPPORTUNITY COST considerations, which mitigate against using a lower discount rate for public projects for fear that mediocre public projects may displace good private sector projects if the former have an easier criterion to meet;
(d) the relevant constraints. This group includes legal, administrative and budgetary constraints, and constraints on the redistribution of income. Essentially, cost-benefit analysis concentrates on the economic efficiency benefits from a project and, providing the benefits exceed the costs, recommends acceptance of the project, regardless of who benefits and who bears the costs. However, where the decision-maker feels that the redistribution of income associated with a project is unacceptable, he may reject that project despite its net benefits.
There is always uncertainty surrounding the estimates of future costs and benefits associated with a public investment project, and cost-benefit analysis needs to allow for this uncertainty by testing the sensitivity of the net benefits to changes in such factors as project life and interest rates. See WELFARE ECONOMICS, COST EFFECTIVENESS, TIME PREFERENCE, ENVIRONMENTAL AUDIT, VALUE FOR MONEY AUDIT, ENVIRONMENTAL IMPACT ASSESSMENT.
cost centre an organizational subunit of a firm that is given responsibility for minimizing COSTS but has no control over its product pricing and revenues. Cost centres facilitate management control by helping to ascertain a unit’s operating costs. See PROFIT CENTRE, INVESTMENT CENTRE.
cost drivers the factors that cause COSTS to vary within an organization and between organizations. Cost drivers can be related to the various value-creating activities within an organization. The main cost drivers are: firm size or scope (ECONOMIES OF SCALE or SCOPE); cumulative experience; (LEARNING CURVE); organization of transactions (VERTICAL INTEGRATION); and other factors such as location, raw material prices and process efficiency. The ability to ‘drive’ or ‘manage’ costs down (or to contain cost increases) is an important strategic consideration where cost leadership is the key basis of the firm’s COMPETITIVE ADVANTAGE over rival suppliers. See VALUE-CREATED MODEL.
cost effectiveness the achievement of maximum provision of a good or service from given quantities of resource inputs. Cost effectiveness is often established as an objective when organizations have a given level of expenditure available to them and are seeking to provide the maximum amount of service in a situation where service outputs cannot be valued in money terms (e.g. the UK National Health Service). Where it is possible to estimate the money value of outputs as well as inputs, then COST-BENEFIT techniques can be applied. See VALUE FOR MONEY AUDIT.
cost function a function that depicts the general relationship between the COST of FACTOR INPUTS and the cost of OUTPUT in a firm. In order to determine the cost of producing a particular output it is necessary to know not only the required quantities of the various inputs but also their prices. The cost function can be derived from the PRODUCTION FUNCTION by adding the information about factor prices. It would take the general form:
Qc = f(p1 I1, p2, I2, … , pn In)
where Qc is the cost of producing a particular output, Q, and p1 ,p2, etc.,