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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 Activity 6.3 Draw table on board. Students complete questions

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 Ignores issues such as how to reduce wastage or increase sales

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
Students complete Activity 6.5

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 Forecasts
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 Variance Analysis Difference between budgetary figure and actual figure Worker, Supervisor & Manager involvement Motivates & More realistic budgets result More likely to work harder to achieve target if they have their say in setting it

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 Students complete Activity 6.6 Page 102

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