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

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Presentation on theme: "Chapter 6 – Business Costs & Revenue Syllabus Unit – Business Finance and Accounting."— Presentation transcript:

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? C omparing Costs & Revenue D etermining Profit/Loss C omparing locations of a possible new site P rice Determination

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

5 Fixed Costs (FC) D o not vary with output in the short- term P aid regardless of output Overhead Costs

6 Business Costs Variable Costs (VC) V ary with output C osts directly associated with output Direct Costs

7 Total Costs (TC) F ixed 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; C osts R evenue Price x Quantity (P x Q) L evel 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 F ixed Costs are $30,000 per year V ariable Costs are $5 per unit E ach tyre is sold for $10 M aximum output is 10,000 tyres per year

12 Advantages I dentify break-even point of production C alculate maximum profit E xpected profit/loss at different levels of output I mpacts on BEP with various business decisions H elps in decision-making M argin of Safety

13 Disadvantages A ssumes all goods produced are sold F ixed costs constant only if scale of production doesnt change I gnores other aspects of the business which need to be analysed S traight lines not realistic

14 Break-Even Equation Breakeven Equation Total Fixed Costs Contribution Per Unit Contribution S elling Price – Variable Cost

15 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 month? c) 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 D irectly identified with each unit of production V ary with the level of output

17 Indirect Costs N ot identified with each unit of production A ssociated with performing a range of tasks or producing a range of products O verheads

18 Marginal Costs A dditional costs for producing one more unit of product E xtra variable costs will be needed for that one extra unit

19 Average Cost Per Unit Total Costs Output

20 Economies of Scale Purchasing Economies B ulk-buying discounts

21 Marketing Economies T ransport A dvertising

22 Financial Economies L ower interest rates

23 Managerial Economies S pecialists in all departments

24 Technical Economies S pecialisation L atest equipment

25 Diseconomies of Scale Poor Communication

26 Slower Decision-Making

27 Low Moral

28 Budgets & Forecasts Budgets P lans for the future containing numerical or financial targets Forecasts A re 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 S ales / Customer Demand E xchange rates of the currency W age rises

31 A managers biggest problem is ……. uncertainty about the future

32 Forecasting Methods Trend A n underlying movement or direction of data overtime T his can be extended into the future

33 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 M ost likely to be on future sales

35 Market Research Surveys U seful in forecasting sales that are yet to be launched onto the market N o 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; R evenues C osts P roduction Levels R aw Material Requirements L abour Hours Needed C ash Flow Master budget is derived from these smaller budgets

39 Budget and Forecasts

40 Budgets Advantages D epartmental Target Setting G ives focus M otivates V ariance Analysis W orker, Supervisor & Manager involvement H elps to control the business

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

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