UNIT 2 BUSINESS RESOURCES

Objectives Welsh side here please P6 Illustrate the use of budgets as a means of exercising financial control of a selected company. To be able to list the costs involved in running a business? To be able to describe what is a budget? To be able to describe a Fixed, Zero Based and Incremental Budget

What is a budget? Welsh side here please throughout the presentation. Thankyou. A budget is a plan on what a business can spend its money on and it is usual for a business to budget on a yearly basis a fixed amount that the owners have agreed to spend in that given time.

Types of Budgets? There are three types of budgets Fixed Budget – set amount of money to spend on in a given period of time Zero Based budget – give staff no budget but justify all expenditure Incremental budget – getting bigger/increasing on period of time and is lined to performance

Factors to be considered A business must consider two main factors within the budget and these are Variable and Fixed costs.

Costs What costs are involved in a business? How do you manage costs? Listen to the following video clip and take note of the costs that are listed. We have already covered human, physical and technological resources now it’s the financial resources you need to pay for bills, wages etc and how to get this for the business.

Listen to the BBC extract on Costs http://www.bbc.co.uk/schools/gcsebitesize/business/finance/accountingprinciplesvid.shtml

What are Costs? Costs are the expenses involved in making a product. Firms incur costs by trading. Some costs, called variable costs, change with the amount produced. For example, the cost of raw materials rises as more output is made. Other costs, called fixed costs, stay the same even if more is produced. Office rent is an example of a fixed cost which remains the same each month even if output rises.

Another way of classifying costs is to distinguish between direct costs and indirect costs. Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product. The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).

Fixed Costs Fixed costs do not change as output varies.  In other words, they are fixed even if output moves up or down from period to period.

Examples of fixed costs include: - Rent & council tax - Wages and salaries - Marketing (advertising, market research) - Insurance, banking & legal fees - Software - Consultant and adviser costs - Design and development - Heating, light and other energy costs - Leased equipment charges

Note – just because a cost is classified as “fixed”, that does not mean that the cost will stay the same. For example, the rental of an office or shop will be paid to the landlord. The rent stays the same for a specific period (e.g. 5 years).  However, the rent may change (up or down) when the rental agreement is renegotiated when due. The important point about a cost like rent being fixed is that it has to be paid, whatever the level of sales achieved.

Fixed costs are particularly important when it comes to calculating the break-even output of a business.  A business needs to generate enough contribution (a kind of profit) to cover its fixed costs in order for it to break-even. The higher the level of fixed costs in a business, the higher must be the achieved output in order to break-even. As a result, a good strategy for most start-ups is to focus on controlling and minimising fixed costs.

Variable costs Variable costs are corporate expenses that vary in direct proportion to the quantity of output. Unlike fixed costs, which remain constant regardless of output, variable costs are a direct function of production volume, rising whenever production expands and falling whenever it contracts.

variable costs…… Examples of common variable costs include raw materials, packaging, and labour directly involved in a company's manufacturing process.

Exercises Thank you  Describe what is a budget? Describe the following: Fixed Budget, Zero Based Budget Incremental Budget Answer the Question sheet on Costs The above must be completed in class and handed in at the end of the session. Thank you 

Web source of information http://www.bbc.co.uk/bitesize/quiz/q72001881 http://beta.tutor2u.net/business/blog/revision-quiz-breakeven-basics-for-as-business http://beta.tutor2u.net/business/blog/what-are-fixed-costs