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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

Chapter 6 – Business Costs & Revenue

Syllabus Unit – Business Finance and Accounting

you will learn
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
business costs
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
business costs1
Business Costs
  • List 10 costs that would be involved in opening and running a new factory making sport shoes
business costs2
Business Costs
  • Fixed Costs (FC)
    • Do not vary with output in the short-term
    • Paid regardless of output
    • “Overhead Costs”
business costs3
Business Costs
  • Variable Costs (VC)
    • Vary with output
    • Costs directly associated with output
    • “Direct Costs
business costs4
Business Costs
  • Total Costs (TC)
    • Fixed Costs

+

Variable Costs

break even
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
break even charts1
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
break even charts2
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
break even charts3
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
Break-Even Equation
  • Breakeven Equation

Total Fixed Costs

Contribution Per Unit

  • Contribution
    • Selling Price – Variable Cost
break even equation1
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?
more business costs
More Business Costs
  • Direct Costs
    • Directly identified with each unit of production
    • Vary with the level of output
more business costs1
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 costs2
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 costs3
More Business Costs
  • Average Cost Per Unit

Total Costs

Output

economies of scale
Economies of Scale
  • Purchasing Economies
    • Bulk-buying discounts
economies of scale1
Economies of Scale
  • Marketing Economies
    • Transport
    • Advertising
economies of scale2
Economies of Scale
  • Financial Economies
    • Lower interest rates
economies of scale3
Economies of Scale
  • Managerial Economies
    • Specialists in all departments
economies of scale4
Economies of Scale
  • Technical Economies
    • Specialisation
    • Latest equipment
diseconomies of scale
Diseconomies of Scale
  • Poor Communication
diseconomies of scale1
Diseconomies of Scale
  • Slower Decision-Making
budgets forecasts
Budgets & Forecasts
  • Budgets
    • Plans for the future containing numerical or financial targets
  • Forecasts
    • Are predictions of the future
reasons why businesses fail
Reasons why businesses fail
  • Do not consider future at all and make no plans
  • Unprepared for unforeseen events
budgets forecasts1
Budgets & Forecasts
  • Managers try to predict/forecast
    • Sales / Customer Demand
    • Exchange rates of the currency
    • Wage rises
budgets forecasts2
Budgets & Forecasts
  • A managers biggest problem is …….

uncertainty about the future

forecasting methods
Forecasting Methods
  • Trend
    • An underlying movement or direction of data overtime
    • This can be extended into the future
forecasting methods1
Forecasting Methods
  • Line of Best Fit
    • Figures plotted on graph (scatter diagram)
    • Line extended into the future
forecasting methods2
Forecasting Methods
  • Panel Consensus
    • A panel of experts are asked for their opinions
    • Most likely to be on future sales
forecasting methods3
Forecasting Methods
  • Market Research Surveys
    • Useful in forecasting sales that are yet to be launched onto the market
    • No previous data exists
budgets
Budgets
  • Plans for the future containing numerical and financial targets
budgets1
Budgets
  • Businesses plan months/years ahead
  • Plan ahead for future reactions
  • Future targets in numerical/financial terms
budgets2
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
budgets3
Budgets
  • Advantages
    • Departmental Target Setting
    • Gives focus
    • Motivates
    • Variance Analysis
    • Worker, Supervisor & Manager involvement
    • Helps to control the business
budgets4
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