Skip to main content

Chapter 6: Business costs and revenue

Business costs

All business activity involves some kind of cost. Managers need to think about the because:
  • Whether costs are lower than revenues or not. Whether a business will make a profit or not.
  • To compare costs at different locations.
  • To help set prices.
There are two main types of costs, fixed and variable costs. Here are some types of costs:
  • Fixed costs = stay the same regardless of the amount of output. They are there regardless of whether a business has made a profit or not. Also known as overheads.
  • Variable costs = varies with the amount of goods produced. They can be classified as direct costs (directly related to a product).
  • Total costs = fixed + variable costs
Break-even charts, comparing costs with revenue
Drawing a break-even chart

Uses of break-even charts
There are other benefits from the break-even chart other than identifying the breakeven point and the maximum profit. However, they are not all reliable so there are some disadvantages as well:
Pros:
  • The expected profit or loss can be calculated at any level of output.
  • The impacts of business decisions can be seen by redrawing the graph.
  • The breakeven chart show the safety margin which is the amount by which sales exceed the breakeven point.
Cons:
  • The graph assumes that all goods produced are sold.
  • Fixed costs will change if the scale of production is changed.
  • Only focuses on the breakeven point. Completely ignores other aspects of production.
  • Does not take into account discounts or increased wages, etc. and other things that vary with time.
Break-even point: the calcultion method.
It is possible to calculate the breakeven point withought having to draw the graph. We need two formulas to achieve this:
  • Selling Price - Variable Costs = Contribution
  • Break-even point = Total fixed costs/Contribution
Business costs: other definitions
There are other types of costs to be analysed that is split from fixed and variable costs:
  • Direct costs: costs that are directly related to the production of a particular product.
  • Marginal costs: how much costs will increase when a business decides to produce one more unit.
  • Indirect costs: costs not directly related to the product. They are often termed overheads.
  • Average cost per unit: total cost of production/total output
Economies and Diseconomies of scale:
Economies of scale are factors that lead to a reduction in average costs that are obtained by growth of a business. There are five economies of scale:
  • Purchasing economies: Larger capital means you get discounts when buying bulk.
  • Marketing: More money for advertising and own transportation, cutting costs.
  • Financial: Easier to borrow money froAlign Leftm banks with lower interest rates.
  • Managerial: Larger businesses can now afford specialist managers in all departments, increasing efficiency.
  • Technical: They can now buy specialised and latest equipment to cut overall production costs.
However, there are diseconomies of scale which increases average costs when a business grows:
  • Poor communication: It is more difficult to communicate in larger firms since there are so many people a message has to pass through. The managers might loose contact to customers and make wrong decisions.
  • Low morale: People work in large businesses with thousands of workers do not get much attention. They feel they are not needed this decreases morale and in turn efficiency.
  • Slower decision making: More people have to agree with a decision and communication difficulties also make decision making slower as well.
Budgets and forecasts: looking ahead
Business also needs to think ahead about the problems and opportunities that may arise in the future. There are things to try to forecast such as:
  • sales or consumer demands.
  • exchange rates appreciation or depreciation.
  • wage increases.
There are some forecasting methods:
  • Past sales could be used to calculate the trend, which could then be extended into the future.
  • Create a line of best fit for past sales and extend it for the future.
  • Panel consensus: asking a panel of experts for their opinion on what is going to happen in the future.
  • Market research.
Budgets

"Budgets are plans for the future containing numerical and financial targets". Better managers will create many budgets for costs, planned revenue and profit and combine them into one single plan called the master budget.

Here are the advantages of budgets:
  • They set objectives for managers and workers to work towards, increasing their motivation.
  • They can be used to see how well a business is doing by comparing the budget with the result in the process of variance analysis. The variance is the difference between the budget and the result.
  • If workers get a say in choosing the objectives for a budget, the objectives would be more realistic since they are the ones that are going to do it and it also gives them better motivation.
  • Helps control the business and its allocation of resources/money.
All in all, budgeting in useful for:
  • reviewing past activities.
  • controlling current business activity - following objectives.
  • planning for the future.
Finished! That'll be all for today!
====================================================================

Comments

Popular posts from this blog

gadgets that promise to make flying better

The worldwide display of gadgets - like these Apple Watch smartwatches on display in Shanghai, China - is set to decline in 2015 for the first. Hooked to the closed tray table on the back of the passenger seat, the portable gadget is said to support any electronic device up to 7.5 inches he drying time is eternal and inspecting the shriveled treasures feels less like cooking, more like collecting beetles. We talk a lot about essential gadgets that we can't live without and useless gadgets to toss in the Goodwill bin, but we rarely talk about the ones  If you're headed to the beach or any other weekend getaway, don't forget these “essential” gadgets . Of course, no technology is Now that it's been established that Apple actually does check its social media mentions and is even capable of making major changes to its. If you're looking for a way to beef up your bicycle with gadgets that make each journey more enjoyable, keep reading. A lot of smartphones in re

vadina tho modhati anubhavam hot story

                 వదిన తో తొలి అనుభవం నా పేరు హరీష్ అప్పుడు నేను ఇంటర్మీడియట్ సెకండ్ ఇయర్ చదువుతున్నాను , ఇంట్లో నేను చిన్నవాడిని, మేము మొత్తం ముగ్గురం , ఫస్ట్ మా అన్నయ్య తరువాత మా అక్క , నాకు మా అన్నయ కి (brother ) దాదాపు 10 ఇయర్స్ తేడా ఉంటుంది, మా అన్నయ్య కి పెళ్ళయి 7 ఇయర్స్ అయ్యింది , పిల్లలు ఇంకా లేరు , పిల్లలు కలుగాడటం లేదని ఎప్పుడు భాధ పడుతూ ఉంటుంది , నేను వదిన కి బాగా క్లోజ్ గా ఉండే వాడిని , నాతో అంతా చెప్పేది , నేను కూడా వదినకి దే ర్యం చెప్పేవాడిని .  ఒక రోజు మా అన్నయ ఫ్రెండ్ మ్యారేజ్ కి వెళ్ళాల్సి వచ్చి ఆఫీసు లో అర్జెంటు పని వాళ్ళ నన్ను వదినతో వెళ్ళమన్నాడు , మేము ఉండేది హైదరాబాద్ లో పెళ్లి విజయవాడ లో .  మా ఇద్దరిని బస్సు ఎక్కించి అన్నయ వెళ్ళిపోయాడు అది  నైట్ జర్నీ , బస్సు లో ఇద్దరం పక్క పక్క సీట్ లో కూర్చున్నాము, వదిన, నేను చాలా సేపు కబుర్లు చెప్పుకున్నాం , బస్ లో డ్రైవర్ లైట్స్ ఆర్పేసాడు , కాసేపటికి వదిన నిద్రలోకి జారుకుంది , నేను కూడా పడుకుందామని నా సీట్ లో ఒరిగాను , అప్పుడే సరిగ్గా వదిన చెయ్యి నా ప్యాంటు మీద పడింది , నేను ఉలిక్కి పడ్డాను , వదిన పడుకొనే ఉంది , నిద్రలో  వెసి

Jaipur Pink Panthers, Abhishek Bachchan, Pro Kabaddi League, Kabaddi

Jaipur Pink Panthers' owner Abhishek Bachchan said his wife and actress Aishwarya Rai is not just an avid follower of the Pro Kabaddi League side as well as Indian Super League football franchise Chennaiyin FC that he owns but also offers him valuable inputs which aids his functioning as a franchise owner. Raider Jasvir Singh got four points for the Panthers from a single raid with 10 minutes left when he got a touch on the last two Mumba players standing to pack the rivals off for a second lona and two additional points. Things went neck to neck in the initial stage, the highlight being U Mumba captain Anup Kumar taking three rivals out to help his side take a 4-2 lead before the Panthers caught up and then jumped ahead to a two-point lead (8-6). For U Mumba, the points tally in raiding was expectedly led by captain Anup Kumar(11) but what swung the game the Panthers way was superior defending through which they secured 13 points as compared to their rivals'. Stout defe