Presentation is loading. Please wait.

Presentation is loading. Please wait.

5.2 Costs and Revenues Chapter 31. Management Decisions and Cost Business decisions cannot be made without cost information. Why?  Profit or loss cannot.

Similar presentations


Presentation on theme: "5.2 Costs and Revenues Chapter 31. Management Decisions and Cost Business decisions cannot be made without cost information. Why?  Profit or loss cannot."— Presentation transcript:

1 5.2 Costs and Revenues Chapter 31

2 Management Decisions and Cost Business decisions cannot be made without cost information. Why?  Profit or loss cannot be calculated without knowing COST  Marketing will use COST information to determine pricing  COST records are useful in comparing to past performance and help set budgets  COST data can help determine the use of resources…use labor hours or buy automated equipment?

3 Production Costs The financial costs incurred in making a product or providing a service. Costs are classified into categories:  Direct Costs  Indirect Costs  Fixed Costs  Variable Costs  Semi-Variable Costs  Marginal Costs

4 Direct Costs  Costs can be clearly identified with each unit of production and can be allocated to a cost center. Direct costs of a hamburger in a fast-food restaurant is the cost of meat…. You name another Direct cost for a automobile repair shop servicing a car is the labor of the mechanic…You name another Direct cost for a business studies department is the salary of the business teacher…You name another  Common direct costs in manufacturing are labor and materials.  Common direct costs in a service business is the cost of goods sold.

5 Indirect Costs  Costs which cannot be identified with a unit of production – also known as overhead costs Indirect cost to a farm is the purchase of a tractor…. You name another Indirect cost to a automobile repair shop is rent… You name another Indirect cost of running a school is the cost of cleaning… You name another

6 Indirect Costs Indirect Costs can be classified into 4 groups: 1.Production overheads – factory rent, equipment depreciation, electricity 2.Selling and distribution overheads – warehouse, packing, and distribution costs 3.Administration overheads – office rent, clerical salaries 4.Finance overheads – interest on loans

7 Costs are affected by Output Some costs vary with output of production and some costs do not change. Costs can be classified:  Fixed costs – These remain constant no matter what happens to production output (rent)  Variable costs – These vary as production output changes (quantity of raw materials used)  Semi-Variable costs – These include both fixed and variable costs (account charge for electricity plus the electricity used)  Marginal costs – The additional variable cost of producing one more unit

8 Revenue Revenue is the income received from the sale of a product Total Revenue is the total income from the sale of ALL units of the product (quantity X price)

9 Don’t confuse Revenue, Cash Flow, and Profit Remember: Revenue is not the same as cash received from sales.  Revenue is recorded at the time of sale not at the time cash is received. Remember: Revenue is not the same as profit.  All costs of operating the business are subtracted from revenue to determine profit.

10 Contribution to Fixed Costs Contribution per Unit Is the selling price of a product less variable costs per unit. Total Contribution Is the total revenue from the sale of a product less total variable costs of producing it. Contribution is NOT profit. Contribution is what a product “contributes” towards fixed costs, and once these are paid, towards the profits of the business.


Download ppt "5.2 Costs and Revenues Chapter 31. Management Decisions and Cost Business decisions cannot be made without cost information. Why?  Profit or loss cannot."

Similar presentations


Ads by Google