Chapter 6 – Business Costs _ Revenue - IGCSEBus by hcj


									Chapter 6 –
Business Costs & Revenue
Syllabus Unit – Business Finance and Accounting
You will learn ……
 Why businesses need to know the costs
  of running their activities and the revenue
  gained by selling their products
 The different types of costs involved in
  running a business
 How break-even analysis helps managers
  make decisions
 The purpose of budgets and financial
Business Costs
                    Why do we need to
                     know business
                     ◦ Comparing Costs &
                     ◦ Determining
                     ◦ Comparing locations of
                       a possible new site
                     ◦ Price Determination
Business Costs
   List 10 costs that would be involved in
    opening and running a new factory
    making sport shoes
Business Costs
   Fixed Costs (FC)

    ◦ Do not vary with
      output in the short-

    ◦ Paid regardless of

    ◦ “Overhead Costs”
Business Costs
   Variable Costs (VC)

    ◦ Vary with output

    ◦ Costs directly associated
      with output

    ◦ “Direct Costs
Business Costs
   Total Costs (TC)

    ◦ Fixed Costs
      Variable Costs
 The Break-even point (BEP) is the
  point at which cost or expenses and
  revenue are equal: there is no net loss or
 Break-even charts show;
    ◦ Costs
    ◦ Revenue
      Price x Quantity (P x Q)
    ◦ Level of sales to breakeven
Break-Even Charts
Break-even Charts
 Namib Tyres Ltd produce
 motorcycle tyres. The
 following information about
 the business has been
 ◦   Fixed Costs are $30,000 per year
 ◦   Variable Costs are $5 per unit
 ◦   Each tyre is sold for $10
 ◦   Maximum output is 10,000 tyres
     per year
Break-even Charts
   Advantages
    ◦ Identify break-even point of
    ◦ Calculate maximum profit
    ◦ Expected profit/loss at
      different levels of output
    ◦ Impacts on BEP with various
      business decisions
    ◦ Helps in decision-making
    ◦ Margin of Safety
Break-even Charts
   Disadvantages
    ◦ Assumes all goods
      produced are sold
    ◦ Fixed costs constant only
      if scale of production
      doesn’t change
    ◦ Ignores other aspects of
      the business which need
      to be analysed
    ◦ Straight lines not realistic
Break-Even Equation
   Breakeven Equation
      Total Fixed Costs
     Contribution Per Unit

   Contribution
    ◦ Selling Price – Variable Cost
Break-Even Equation
 A fast food restaurant sells meals for $6
  each. The variable costs of preparing and
  serving each meal are $2. The monthly fixed
  costs amount to $3600
a) How many meals must be sold each month
   for the restaurant to break-even?
b) If the restaurant sold 1500 meals in one
   month, what was the profit made in that
c) If the cost of the food ingredients rose by
   $1 per meal, What would be the new
   break-even level of production?
More Business Costs
   Direct Costs
    ◦ Directly identified with each unit of
    ◦ Vary with the level of output
More Business Costs
   Indirect Costs
    ◦ Not identified with each unit of production
    ◦ Associated with performing a range of tasks
      or producing a range of products
    ◦ Overheads
More Business Costs
   Marginal Costs
    ◦ Additional costs for producing one more unit
      of product
    ◦ Extra variable costs will be needed for that
      one extra unit
More Business Costs
   Average Cost Per Unit
      Total Costs
Economies of Scale
   Purchasing Economies
    ◦ Bulk-buying discounts
Economies of Scale
   Marketing Economies
    ◦ Transport
    ◦ Advertising
Economies of Scale
   Financial Economies
    ◦ Lower interest rates
Economies of Scale
   Managerial Economies
    ◦ Specialists in all departments
Economies of Scale
   Technical Economies
    ◦ Specialisation
    ◦ Latest equipment
Diseconomies of Scale
   Poor Communication
Diseconomies of Scale
   Slower Decision-Making
Diseconomies of Scale
   Low Moral
Budgets & Forecasts
   Budgets
    ◦ Plans for the future
      containing numerical or
      financial targets

   Forecasts
    ◦ Are predictions of the
Reasons why businesses fail

   Do not consider
    future at all and make
    no plans

   Unprepared for
    unforeseen events
    Budgets & Forecasts
   Managers try to

    ◦ Sales / Customer

    ◦ Exchange rates of the

    ◦ Wage rises
Budgets & Forecasts
   A managers biggest problem is …….
    uncertainty about the future
Forecasting Methods
   Trend
    ◦ An underlying movement or direction of data
    ◦ This can be extended into the future
Forecasting Methods
   Line of Best Fit
    ◦ Figures plotted on graph (scatter diagram)
    ◦ Line extended into the future
Forecasting Methods
   Panel Consensus
    ◦ A panel of experts are asked for their
    ◦ Most likely to be on future sales
Forecasting Methods
   Market Research Surveys
    ◦ Useful in forecasting sales that are yet to be
      launched onto the market
    ◦ No previous data exists
   Plans for the future containing numerical
    and financial targets
 Businesses plan months/years ahead
 Plan ahead for future reactions
 Future targets in numerical/financial terms
   Budgets are set for;
    ◦   Revenues
    ◦   Costs
    ◦   Production Levels
    ◦   Raw Material Requirements
    ◦   Labour Hours Needed
    ◦   Cash Flow
   Master budget is derived
    from these smaller
Budget and Forecasts
   Advantages
    ◦   Departmental Target Setting
    ◦   Gives focus
    ◦   Motivates
    ◦   Variance Analysis
    ◦   Worker, Supervisor & Manager involvement
    ◦   Helps to control the business

Reviewing past activities   Budgeting useful for:   Planning for the Future

 Comparing actual with      Controlling current        Setting Goals to be
   budgeted figures         business activity –              achieved
                            Keeping to Targets

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