Transcript Costs & Breakeven

http://www.bized.ac.uk
Costs and Budgeting
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Costs and Budgeting
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Costs
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Costs
• Anything incurred during the production
of the good or service to get the output
into the hands of the customer
• The customer could be the public (the
final consumer) or another business
• Controlling costs is essential to business
success
• Not always easy to pin down where
costs are arising!
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Cost Centres
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Cost Centres
• Parts of the business to which particular
costs can be attributed
• In large businesses this can be a
particular location, section of the
business, capital asset or human
resource/s
• Enable a business to identify where
costs are arising and to manage those
costs more effectively
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Full Costing
• A method of allocating indirect costs to
a range of products produced by the
firm.
– e.g. if a firm produces three products. a, b,
and c and has indirect costs of £1 million,
assume proportion of direct costs of 20%
for a, 55% for b and 25% for c.
• Indirect costs allocated as 20% of 1
million to a, 55% of £1 million to b and
25% of £1 million to c.
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Absorption Costing
• All costs incurred are allocated to
particular cost centres – direct
costs, indirect costs, semi variable
costs and selling costs
• Allocates indirect costs more
accurately to the point where the
cost occurred
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Marginal Costing
• The cost of producing one extra
unit of output (the variable costs)
• Selling price – MC = Contribution
• Contribution is the amount which
can contribute to the overheads
(fixed costs)
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Standard Costing
• The expected level of costs
associated with the production of a
good/service
– Actual costs – Standard costs =
Variance
• Monitoring variances can help the
business to identify where
inefficiencies or efficiencies might
lie
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Total Revenue
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Total Revenue
• Total Revenue = Price x Quantity Sold
• Price can be raised or lowered to
change revenue – price elasticity of
demand important here
– Different pricing strategies can be used –
penetration, psychological, etc.
• Quantity Sold can be influenced by
amending the elements of the
marketing mix – 7 Ps
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Break-Even
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Costs/Revenue
Break-Even Analysis
TR
TR
TC
VC
TheAs
Break-even
point
output
is
Total
revenue
is
Thewhere
totaltotal
costs
The
lower
the
occurs
generated,
the
Initially a by
firm
determined
the
therefore
revenue
equals
total
price,
the
less
firm
will
incur
willcharged
incur fixed
price
and
(assuming
costs
– the
firm,
in
variable
costs
steep
the
total
costs,
thesesold
do– –
quantity
thisthe
example
would
accurate
these
vary
not depend
onbe
revenue
curve.
again
this
will
haveforecasts!)
to
sell
Q1
to
is
the
directly
with
the
output or
sales.
determined
by
generate
sufficient
amount
sum
of produced
FC+VC
expected
forecast
revenue to cover
its
sales
initially.
costs.
FC
Q1
Output/Sales
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Costs/Revenue
Break-Even Analysis
TR (p = £3)
TR (p = £2)
TC
VC
If the firm chose
to set price higher
than £2 (say £3)
the TR curve
would be steeper –
they would not
have to sell as
many units to
break even
FC
Q2
Q1
Output/Sales
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Break-Even Analysis
TR (p = £1)
Costs/Revenue
TR (p = £2)
TC
VC
If the firm chose
to set prices lower
(say £1) it would
need to sell more
units before
covering its costs
FC
Q1
Q3
Output/Sales
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Break-Even Analysis
TR (p = £2)
Costs/Revenue
Profit
TC
VC
Loss
FC
Q1
Output/Sales
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Break-Even Analysis
Costs/Revenue
TR (p = £3)
TR (p = £2)
Margin of
A
higher
price
safety
shows
how far sales
would
lower
can fall
before
the
break
Assume
losses made. If
even
point
current
Q1
= 1000sales
and
and
the
Q2
1800, sales
at =Q2
could fallof
by 800
margin
units before
a
safety
would
loss would be
widen
made
TC
VC
Margin of Safety
FC
Q3
Q1
Q2
Output/Sales
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Costs/Revenue
High initial FC.
Eurotunnel’s
FC 1
Interest on debt
problem
rises each year – FC
rise therefore
FC
Losses get
bigger!
TR
VC
Output/Sales
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Break-Even Analysis
• Remember:
• A higher price or lower price does
not mean that break even will
never be reached!
• The BE point depends on the
number of sales needed to
generate revenue to cover costs –
the BE chart is NOT time related!
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Break-Even Analysis
•Importance of Price Elasticity of
Demand:
•Higher prices might mean fewer sales
to break-even but those sales may take a
longer time to achieve.
•Lower prices might encourage more
customers but higher volume needed
before sufficient revenue generated to
break-even
Copyright 2004 – Biz/ed
http://www.bized.ac.uk
Break-Even Analysis
• Links of BE to pricing strategies and
elasticity
• Penetration pricing – ‘high’ volume,
‘low’ price – more sales to break even
• Market Skimming – ‘high’ price ‘low’
volumes – fewer sales to break even
• Elasticity – what is likely to happen to
sales when prices are increased or
decreased?
Copyright 2004 – Biz/ed