8715_300_uko4_ppt_5

Page 1: Introduction

The presentation introduces the T-Level Technical Qualification in Management and Administration (Level 3), specifically focusing on management and administration core aspects, including finance and forms of expenditure.

Page 2: Learning Objectives

By the end of this session, learners will be able to:

• Discuss various types of expenditure within organizations.

• Explain how expenditure varies depending on the size and purpose of the organization.

• Understand the definition, purpose, and types of capital expenditure.

• Revisit the different types of fixed and variable costs in organizations.

• Explore why fixed and variable costs influence overall expenditure differently.

Page 3: Forms of Expenditure

Expenditure refers to the act of paying cash or credit in exchange for goods or services. It can also be termed cost, outlay, charge, spending, outgoings, or disbursement. While expenditure generally means spending money, in a business context, it has a more specific connotation than mere expenses.

Page 4: Expenditure vs. Expenses

Understanding the distinction between expenditure and expenses is crucial:

• Expenditure refers to the total cost paid for goods or services, recorded at the time of purchase and evidenced by receipts/invoices. For example, purchasing equipment for £20 million is recorded as capital expenditure.

• Expenses are recorded to offset revenues against taxes. For instance, the depreciation of the previously mentioned equipment would affect financial reports as an annual expense spread over its useful life.

Page 5: Different Types of Expenditure

Expenditure types fall into two broad categories: capital and revenue expenditure, both essential for starting, developing, and growing businesses. The organization's size, scale, and purpose influence the frequency and amount of planned expenditure.

• Types of Expenditure:

  • Capital expenditure

  • Revenue expenditure

  • Deferred revenue expenditure

Page 6: Capital Expenditure

Capital expenditure occurs when an organization acquires an asset with an expected life of more than one year. Such assets include:

• Land or buildings

• Plant and machinery

• Equipment

• Infrastructure (e.g., IT services) These assets are recorded on the balance sheet as fixed assets.

Page 7: Characteristics of Capital Assets

Capital assets often require significant upfront costs and are expected to generate substantial revenues over time. They necessitate ongoing maintenance, and the costs cannot be fully deducted in the year of purchase; instead, they are spread over the asset's lifespan in financial reports.

Page 8: Case Study - Car Manufacturer

An example of capital expenditure is a UK car manufacturer that invests £10 million in a new production line with a ten-year lifespan. This purchase is classified as a non-current asset on the balance sheet and depreciated at £1 million per year.

Page 9: Revenue Expenditure

Conversely, revenue expenditure facilitates short-term benefits and funds ongoing operations. It is recorded as operating expenses, typically providing benefits within one year, making a financial impact in the same year it occurs.

Page 10: Case Study - Revenue Expenditure

The same car manufacturer incurs revenue expenditure by hiring engineers and technicians to maintain the new production line. These costs are recorded as operating expenses in the income statement.

Page 11: Deferred Revenue Expenditure

Deferred revenue expenditure, or deferred expenses, involves prepayments for goods/services that will benefit the organization in the future. It is recorded as an asset until the benefits are realized, at which point it affects profits.

Page 12: Case Study - Deferred Revenue Expenditure

In this scenario, the car manufacturer pays in advance for semiconductors with a one-year lead time, categorizing this as a deferred asset on its financial documents due to the anticipated future benefits.

Page 13: Fixed and Variable Costs

Expenditures include both fixed and variable costs:

• Fixed Costs: Remain constant regardless of production levels (e.g., rent).

• Variable Costs: Fluctuate with production levels (e.g., materials). Effective cost management is crucial for ensuring profitability.

Page 14: Economies of Scale - Fixed Costs

Larger organizations benefit from economies of scale; fixed costs, which need to be covered regardless of production, become less per unit as production scales up.

Page 15: Economies of Scale - Types

Economies of scale can be:

• Technological

• Specialism

• Purchasing Additionally, there are other internal economies like financial, marketing, R&D, and management economies that support larger organizations in achieving operational efficiencies.

Page 16: Technological Economies of Scale

Technological economies often apply to capital-intensive industries, leveraging mass production techniques and advanced equipment to increase productivity and reduce costs.

Page 17: Specialism Economies of Scale

Specialism economies arise from focusing on specific operational areas, enabling higher efficiency, although attracting and retaining skilled workers may incur higher costs.

Page 18: Purchasing Economies of Scale

This involves leveraging buying power to negotiate lower costs through bulk buying and guaranteed contracts, which some large organizations have been criticized for abusing.

Page 19: Other Economies of Scale

Additional economies include financial advantages (easier borrowing), increased marketing effectiveness, and improved R&D, all aiding bigger companies in maintaining their competitive edge.

Page 20: Diseconomies of Scale

When organizations expand too much, they may experience diseconomies, such as decreased coordination and increased complexity, leading to inefficiencies and potential increases in production costs.

Page 21: Variations in Expenditure

Business expenditure is vital for maintaining operations, encompassing labor costs, materials, and overheads. Understanding these expenditures aids management in decision-making and accomplishing business objectives.

Page 22: Staff Payroll (1)

Staff payroll, required by law, includes records of employee salaries, deductions, and preparation of payslips, as well as reporting to HMRC. Accurate payroll management is crucial for business integrity.

Page 23: Staff Payroll (2)

Employees' compensation encompasses gross pay, hourly wages, statutory pay, tips, and other payments, each requiring careful consideration under taxation rules.

Page 24: Staff Payroll (3)

Deductions include taxes and contributions managed through either manual or software means, and accuracy on individual tax codes is essential for compliance.

Page 25: Staff Payroll (4)

The size of the organization influences payroll administration, with larger firms often having dedicated departments while smaller operations may handle this administratively or outsource it.

Page 26: Utilities

Utilities comprise essential services, including energy, telephone, internet, and water, with costs impacted by various factors like business size, location, and ownership of premises.

Page 27: Insurance

Business insurance protects against financial losses due to unforeseen events, covering areas like professional indemnity and public liability, making it critical for operational security.

Page 28: Insurance Needs

Businesses providing professional services face risks such as negligence and confidentiality breaches, necessitating adequate insurance to mitigate their vulnerabilities.

Page 29: Company Vehicles

Managing company vehicles involves significant expenditures including maintenance, fuel, and insurance, with an organization’s obligations varying based on its operational needs.

Page 30: Additional Vehicle Responsibilities

Responsibilities related to company vehicles encompass ensuring safety, managing driver roles, conducting license checks, and deciding on vehicle usage policies, all crucial for compliance and operational efficiency.

Page 31: Summary of Learning

In this session, we revisited:

• The various types of expenditures in organizations.

• How these expenditures vary based on organizational size and purpose.

• The definition, purposes, and types of capital expenditure.

• Different types of fixed and variable costs and their influence on overall expenditure.

Page 32: Questions

This concludes the session on financial expenditure regarding management and administration. Any questions or clarifications required?