Learning Objectives Identify the difference between the differing types of costs Identify the different types of revenue Explain the importance of costs, revenue and profit for a business

_____________ - ______________ Starter _____________ - ______________ = PROFIT!

Covering the costs of a new product or service This presentation provides an overview of the key points in this chapter. Note for tutors: If you wish to print out these slides, with notes, it is recommended that, for greater clarity you select the ‘pure black and white’ option on the PowerPoint print dialogue box.

Types of costs 1 Start-up costs: Are payments made before, or soon after, the start of a project Occur only once May be quite high (eg for a new building) When a business is planning a new project or venture it will need to think about all the costs involved. The first type of costs are those which will arise before anything is up and running. These are known as start-up costs. For instance, a pizza restaurant which wants to offer a delivery service would need to buy a van.

Examples of start-up costs New building or extension to existing building New machines, including installation Office equipment, including ICT Market research and advertising Initial stocks of materials Installation of gas, electricity, telephone lines New vehicles This slide gives examples of start-up costs. However, each situation will have its own particular items. Therefore the pizza restaurant needed a van, but a leisure centre which wanted to open a restaurant facility would have a different set of start-up costs entirely (catering equipment etc)

Types of costs 2 Running costs: These begin once the project has started They arise on a regular basis Must be paid for as long as the project lasts Once the venture is underway, other costs will be incurred on a routine basis. These are called running costs. For instance, the pizza restaurant would have to buy petrol or diesel for the van on a regular basis.

Examples of running costs Wages and salaries Heating and electricity Repairs and maintenance Business rent and rates Materials and stationery Telephone Advertising Vehicle running costs (eg diesel fuel) This slide only gives a fraction of the possible running costs which could be incurred. The main point is for students to understand that all these costs will be incurred on a regular basis, eg electricity would be paid for every month, production materials would be ordered when stocks are running low etc.

Warning! Some types of costs can be both start-up and running costs, eg Stock (initial stock = start-up; regular stock = running) Advertising (initial adverts = start-up; regular adverts = running) Students may have difficulties if faced with costs which can be either start-up costs or running costs. Other examples include raw materials, first electricity bill (or installation) and then regular bills, first link to Internet Service Provider and then regular charges etc. Students could be asked to suggest other examples.

Key questions to ask Is the bill paid once only? If so, cost is a start-up cost. Is the bill paid regularly? If so, cost is a running cost. This slide presents student with the fundamental difference between the two types of costs. Asking this question should enable them to differentiate between the two types of costs without too much difficulty.

Importance of costs Questions: Why is it important to know your start up and running costs? Why is it important to reduce costs?

The basics of break-even There are two types of costs: Variable costs increase by a step every time an extra product is sold (eg cost of ice cream cornets in ice cream shop) Fixed costs have to be paid even if no products are sold (eg rent of ice cream shop) Students should understand that costs are incurred in every business. The student handbook gives the example of a pizza outlet that has to heat the building and pay business rates even if hardly anyone comes for a meal. Every person who buys a meal causes additional costs because of the ingredients in the food eaten.

Examples of variable costs Variable costs increase with the amount of production Raw materials Petrol Labour (paid by the hour) Packaging

Example of Variable Costs One product costs £1 to produce Costs of production £4 £3 £2 £1 1 2 3 4 Production level

Examples of Fixed Costs Fixed costs remain the same no matter the production level Rent Business rates (tax on businesses) Salary based employee wages Insurance

Example of Fixed Costs Costs of production £400 £300 £200 £100 1 2 3 4 1 2 3 4 Production level

Assessment Slides Write a powerpoint that examines all that you have learnt today include examples (inc pics) for each of the following: Start up costs Running costs

Choose a Business Develop a powerpoint for a new business venture that you wish to setup. Price and identify: Fixed costs Variable costs of your product/service Start up costs Running costs

Sales Revenue Revenue = selling price x quantity sold i.e – if a product is sold for £15 and sells 10 units then it will bring in £150 £15 x 10 = £150