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Chapter 6 – Business Costs & Revenue

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

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Chapter 6 – Business Costs & Revenue

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  1. Chapter 6 – Business Costs & Revenue Syllabus Unit – Business Finance and Accounting

  2. 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 forecasts

  3. Business Costs • Why do we need to know business costs? • Comparing Costs & Revenue • Determining Profit/Loss • Comparing locations of a possible new site • Price Determination

  4. Business Costs • List 10 costs that would be involved in opening and running a new factory making sport shoes

  5. Business Costs • Fixed Costs (FC) • Do not vary with output in the short-term • Paid regardless of output • “Overhead Costs”

  6. Business Costs • Variable Costs (VC) • Vary with output • Costs directly associated with output • “Direct Costs

  7. Business Costs • Total Costs (TC) • Fixed Costs + Variable Costs

  8. Break-Even • The Break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain • Break-even charts show; • Costs • Revenue • Price x Quantity (P x Q) • Level of sales to breakeven

  9. Break-even

  10. Break-Even Charts

  11. Break-even Charts Namib Tyres Ltd produce motorcycle tyres. The following information about the business has been obtained • 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

  12. Break-even Charts • Advantages • Identify break-even point of production • 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

  13. 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

  14. Break-Even Equation • Breakeven Equation Total Fixed Costs Contribution Per Unit • Contribution • Selling Price – Variable Cost

  15. 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 • How many meals must be sold each month for the restaurant to break-even? • If the restaurant sold 1500 meals in one month, what was the profit made in that month? • If the cost of the food ingredients rose by $1 per meal, What would be the new break-even level of production?

  16. More Business Costs • Direct Costs • Directly identified with each unit of production • Vary with the level of output

  17. 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

  18. 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

  19. More Business Costs • Average Cost Per Unit Total Costs Output

  20. Economies of Scale • Purchasing Economies • Bulk-buying discounts

  21. Economies of Scale • Marketing Economies • Transport • Advertising

  22. Economies of Scale • Financial Economies • Lower interest rates

  23. Economies of Scale • Managerial Economies • Specialists in all departments

  24. Economies of Scale • Technical Economies • Specialisation • Latest equipment

  25. Diseconomies of Scale • Poor Communication

  26. Diseconomies of Scale • Slower Decision-Making

  27. Diseconomies of Scale • Low Moral

  28. Budgets & Forecasts • Budgets • Plans for the future containing numerical or financial targets • Forecasts • Are predictions of the future

  29. Reasons why businesses fail • Do not consider future at all and make no plans • Unprepared for unforeseen events

  30. Budgets & Forecasts • Managers try to predict/forecast • Sales / Customer Demand • Exchange rates of the currency • Wage rises

  31. Budgets & Forecasts • A managers biggest problem is ……. uncertainty about the future

  32. Forecasting Methods • Trend • An underlying movement or direction of data overtime • This can be extended into the future

  33. Forecasting Methods • Line of Best Fit • Figures plotted on graph (scatter diagram) • Line extended into the future

  34. Forecasting Methods • Panel Consensus • A panel of experts are asked for their opinions • Most likely to be on future sales

  35. Forecasting Methods • Market Research Surveys • Useful in forecasting sales that are yet to be launched onto the market • No previous data exists

  36. Budgets • Plans for the future containing numerical and financial targets

  37. Budgets • Businesses plan months/years ahead • Plan ahead for future reactions • Future targets in numerical/financial terms

  38. Budgets • Budgets are set for; • Revenues • Costs • Production Levels • Raw Material Requirements • Labour Hours Needed • Cash Flow • Master budget is derived from these smaller budgets

  39. Budget and Forecasts

  40. Budgets • Advantages • Departmental Target Setting • Gives focus • Motivates • Variance Analysis • Worker, Supervisor & Manager involvement • Helps to control the business

  41. Budgets Reviewing past activities Budgeting useful for: Planning for the Future Comparing actual with budgeted figures Controlling current business activity – Keeping to Targets Setting Goals to be achieved

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