Unit 3.2 Costs and Revenues

Slides:



Advertisements
Similar presentations
1. Costs & Revenues Pages Topic 3.2 (SL)
Advertisements

COST AND REVENUE ANALYSIS of production.
UNIT: 5.3 – Break-even Analysis pg. 642 Understand/practice break-even analysis & margin of safety IB Business Management.
Costs & Break-Even GCSE Business Studies tutor2u™
Chapter 6 Cost of Production.
Chapter 5. What is Supply? The amount of a product that would be offered for sale at all possible prices that could prevail in the market. The producer.
Costs and Costing Systems Cost Units – units of output to which costs can be charged A cost is simply an item of expenditure Costs are defined as the normal.
O.M. Revenue is the money a b.receives from the sale of products to customers.A positive difference between revenues and costs will then leave the b.with.
Cost concepts COST is the Expenditure incurred on various inputs to produce goods and services. Cost function : Functional relationship between cost and.
IB Business and Management
 To understand the different types of costs that exist and how you use them in calculations.
Costs & Revenue Chapter 31.
3.2 Accounts -Costs & Revenue-
Supply.  The concept of supply is based on voluntary decisions made by producers.  Supply; the amount of a product that would be offered for sale.
Costing and pricing decisions Costs are defined as the normal business expenses incurred in bring the goods (or services) to their present location and.
Calculating Costs. Costs Aim: Understand what a business costs are. HW: Ch 16 Q. 1 & 2 pg 65 & 67.
INDUSTRIAL STUDIES EAT 221 Unit 7 - Finance. INDUSTRIAL STUDIES Introduction Types of cost –Direct, Indirect –Fixed, variable, total Relationship between.
Who wants to be an accountant?. What is the Goal of Business Firms?  The goal of every company is to MAXIMIZE PROFITS.
Unit 5.2: Costs and Revenues Examine types of costs and sources of revenue Explain the role of contribution IB Business Management.
IB Business and Management
BREAK EVEN ANALYSIS 2 Importance of Planning and Control w Businesses must cover costs or they will make a loss w Some new businesses will aim to only.
Costs. Introducing the topic Cutting costs to increase profits. Page 507 Answer all questions.
Accounting Costs, Profit, Contribution and break Even Analysis.
COSTS Classification of Costs ACCOUNTING & FINANCE Department of Economics and Business BIS.
IB Business and Management
Paying Bills Warm Up: What are some bills your parents pay monthly? What must a producer consider when setting a price for the product being sold?
Business Finance Costs Break-Even Analysis. Revenue and Costs “Revenue” is income earned by a firm when they sell either the goods it makes or the services.
Copyright 2004 – Biz/ed Costs and Budgeting.
PRICING AND PRODUCT MANAGEMENT: UNDERSTANDING COST
Cost of Production. The Production Function A relationship between the number of units of inputs that a firm employs and the corresponding units of output.
Learning Objectives 1 To define and calculate revenue 2 To describe the different types of cost 3 To calculate revenue.
3.2 Costs and Revenues Warm Up: Check your stock portfolio on howthemarketworks.com Select the IB Business Management portfolio In the menu, press rankings.
Calculating Costs, Revenues and Profits. LEARNING OUTCOMES By the end of the lesson I will be able to: –Define Profit, Revenue and Cost –Calculate Revenue.
Accounting & Finance 3.2 ~ COSTS & REVENUES FRIDAY, JUNE 10, 2016 PAGES
LEARNING AIM A: Understand the costs involved in business and how businesses make a profit.
Page 174 – 177 To be an utterly fascinating speaker at a business luncheon, talk to your audience about ways they can reduce costs or increase revenues.
 The financial costs incurred in making a product or providing a service can be classified in several ways. Cost classification is not always as clear.
Learning Objectives To develop your understanding of Break-even analysis To develop your understanding of Break-even analysis To be able to identify the.
5.2.1 COSTS, REVENUE AND PROFIT IB Business & Management IB2 Higher Level.
BREAK-EVEN (BE) Unit 2 Business Development Finance GCSE Business Studies.
Costs and Revenues Unit IB. By the end of the chapter you should be able to: Explain the different types of costs, using examples Comment on the.
LECTURE 4 types of costs.
17 Costs and break-even © Malcolm Surridge and Andrew Gillespie 2016.
Break-Even Analysis.
1. Calculate the fixed cost for 5 units of output.
UNIT 2 BUSINESS RESOURCES
IB Business Management
Chapter 5 Section 3 What are the advantages and disadvantages of buying something off of the Internet?
BUSS1 Formula Profit= Total revenue - Total cost Contribution= Selling price - Variable cost per unit Break-even = fixed cost/ contribution per unit Total.
Cost Concepts Fixed Costs – costs that are independent of level of output (eg. rent on land, advertising fee, interest on loan, salaries) Variable Costs.
Unit 3.3 Break-even Analysis
Bell Ringer! In your mind, what defines “success” for a business ?
IB Business Management
Aims for today Understand how businesses estimate revenues, costs and profits and why this is important. Recognise the difference between fixed and variable.
SHOW ME THE…….
Chapter 5 Vocabulary Review
Business Economics The Bear Necessities.
Wednesday 8th January Mr Nicholls
Classification of Cost
Economics Chapter 5: Supply.
Money received by the business
The Measurement and Importance of Profit
Costs and Budgeting.
What are the advantages and disadvantages of a bank loan?
Extent (How Much) Decisions
Accountants vs. Economists
A what level of production does the business start to make a profit?
2F Break Even Analysis.
Business Costs.
Management in the Built Environment Lesson 5 – PRODUCTION EQUILIBRIUM
Presentation transcript:

Unit 3.2 Costs and Revenues Source: Business Management Textbook by Paul Hoang

Cost vs. Price In everyday language, a consumer might say that a shirt ‘cost $25’. In business language, the correct terminology is ‘the price is $25’. Cost refers to the expenditure in producing the shirt; cost of production which is paid by the producer. Price refers to the amount the product is sold for which is paid by the customer.

Examples of business costs for a clothes retailer See table 3.2 a page 230 (Paul Hoang textbook)

Types of Cost Fixed costs (FC) are the costs of production that a business has to pay regardless of how much it produces or sells. These costs have to be paid even if there is no output. Ex. rent on leased premises, interest payments on bank loans, advertising expenditure, market research, management salaries, stationery, security and professional accountancy fees. Variable costs (VC) are the costs of production that change in proportion with the level of output or sales. As output increases, so too do the total variable costs (TVC). Ex. raw materials.

Total Costs (TC) Total Costs (TC) Total Variable Cost (TVC) Total Fixed Cost (TFC) TC = TFC + TVC

Costs Formulae TC = TFC + TVC TVC = AVC x Q TFC = AFC x Q Where AVC is the average variable cost, AFC is the average fixed cost and Q is the quantity (or level of output)

EXAM TIP! Avoid answering ‘circular answers’ in your script, i.e. do not repeat the question in your answers. For example, when asked to distinguish between fixed and variable costs, many students simply state that “fixed costs are fixed and variable costs are variable”. Review key terms that you are unable to define in your own words.

Semi-variable costs Semi-variable costs contain an element of both fixed and variable costs. They tend to change only when production or sales exceed a certain level of output. Example: mobile phone and internet service providers often allow a user to have a predetermined number of “free minutes” or a limit on data usage and charge extra when user exceeds the quota.

Direct vs. Indirect Costs Direct costs are costs specifically attributed to the production or sale of a particular good or service. It can be traced back to the product and/or to a cost center. Ex. variable costs such as raw materials. Indirect costs (or overheads) are costs that do not directly link to the production or sale of a specific product, e.g. rent, wages of cleaning staff, and lighting.

EXAM TIP! The terms indirect costs and direct costs are used when referring to businesses that produce or sell a range of products and therefore operate ‘cost centers’ and ‘profit centers’ (Unit 3.9). These costs can be either fixed or variable costs, depending on the nature of the business. The terms fixed costs and variable costs, as used in break-even analysis (Unit 3.3), are used when referring to the sale or production of just a single type of product.

Exercise Question 3.2.1 Airline Costs

Calculating Business Costs Exercise Question 3.2.2 Calculating Business Costs

REVENUE Revenue is the money that a business collects from the sale of its goods and services. It is calculated by multiplying the unit price of each product by the quantity sold. Sales Revenue = Price x Quantity Sold

Revenue Formulae Total Revenue (TR) TR = P x Q Average Revenue (AR) AR = TR / Q since P = TR/Q then AR = P

Revenue streams Revenue stream refers to the money coming into a business from its various business activities, e.g. sponsorship deals, merchandise, membership fees and royalties. Revenue does not only come from the sale of goods and services. Money can come into a firm from other means depending on the type of firm and its activities.

Other sources of non-sale revenue: Advertising revenue Transaction fees Franchise costs and royalties Sponsorship revenue Subscription fees Merchandise Dividends Donations Interest earnings Subventions – subsidies offered from the gov’t to certain businesses to help reduce their costs of production. Subventions – usually given to organizations that generate benefits to society such as private schools and hospitals. Also given to help fund R&D.

Example: Revenue streams in the budget airline industry SpiceJet Ltd. charges for hot meals, snacks and beverages Jetstar and Scoot loan iPads for a fee AirAsia customers can pay for the privilege of being seated in a children-free quiet zone Ryanair failed in its attempt to charge passengers for the use of toilets, but now offers advertising space on its planes, including on the wing tips.

Goff’s Organic Fresh Fruits (GOFF) Exercise Question 3.2.3 Goff’s Organic Fresh Fruits (GOFF)

KEY TERMS REVIEW

COST Refers to the sum of money incurred by a business in the production process. Example: costs of raw materials, wages and salaries, insurance, advertising and rent.

DIRECT COSTS Are costs specifically attributed to the production or sale of a particular good or service. Direct costs can be traced back to the product and/or to a cost center.

FIXED COSTS Are the costs that do not vary with the level of output. They exist even if there is no output, e.g. the cost of rent, management salaries and interest repayments on bank loans.

INDIRECT COSTS or OVERHEADS Are costs that do not directly link to the production or sale of a specific product, e.g. rent, wages of cleaning staff and lighting.

PRICE Refers to the amount of money a product is sold for, i.e. the sum paid by the customer.

REVENUE Is the money that a business collects from the sale of its goods and services. It is calculated by multiplying the unit of price of each product by the quantity sold.

REVENUE STREAM Refers to the money coming into a business from its various business activities, e.g. sponsorship deals, merchandise, membership fees and royalties.

SEMI-VARIABLE COSTS Are those that have an element of both fixed costs and variable costs, e.g. power and electricity or salaried staff who also earn commission.

TOTAL COSTS Are the sum of all variable costs and all fixed costs of production.

VARIABLE COSTS Are costs of production that change in proportion to the level of output, e.g. raw materials and piece-rate earnings of production workers. Piece rate = advocated by FW Taylor, pays workers for each item that they produce or sell per time period.