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