Section K Costs Revenue and Contribution with audio final

Page 1: Bank of England Note

• Bank Note: £20 promise to pay the bearer on demand, issued by the Bank of England, signed by the Chief Cashier.

  • Value: 20 Pounds

Page 2: Specific Learning Outcomes

• K1: Define and provide examples of fixed, variable, semi-variable, direct, and indirect costs.

• K2: Calculate total and average costs.

• K3: Explain why businesses need accurate and reliable cost information.

• K4: Define revenue and calculate total and average revenue.

Page 3: Cost Inquiry Questions

• What are the costs to produce the product or service? (Direct production costs)

• What are the marketing costs for the product?

• What are the business overheads? (Indirect costs)

Page 4: Cost Types

• Variable Costs: Costs that vary with production levels (e.g. Direct costs).

• Fixed Costs: Costs incurred regardless of production level (e.g. Indirect costs or overheads).

Page 5: Fixed vs Variable Costs

• Variable Costs (Direct): Change with output (e.g. more cakes require more flour and eggs).

• Fixed Costs (Indirect, Overheads): Remain constant regardless of output (e.g. WiFi costs do not increase with more cakes).

Page 6: Examples of Variable Costs

• Raw materials (e.g. eggs) what is a raw material for some business’s could be a finished product to other business’s

• Bought-in stocks (e.g. jellybeans)

• Wages based on production (e.g. Production wages).

Page 7: Examples of Fixed Costs

• Rent & rates

• Non-production wages and salaries

• Marketing costs (unless directly allocated)

• Insurance, banking & legal fees

• Software and consultancy costs

• Design and development costs.

Page 8: Semi-variable Costs

• Definition: Costs combining fixed and variable elements.

  • Example: Fixed salary plus variable bonus per product produced.

Page 9: Total Costs Calculation Example

• Graham's Van Repairs - Cost Forecast for March:

  • Variable costs per job: £75

  • Fixed costs: Rent £500 + Wages £1,500 + Advertising £100 + Other fixed costs £400 = £2,500 total fixed costs.

  • Expected jobs: 100.

  • Total costs calculation:

    • Variable costs: £75 x 100 = £7,500

    • Total fixed costs = £2,500

    • Total Costs = Variable + Fixed = £7,500 + £2,500 = £10,000.

Page 10: Direct vs Indirect Costs

• Direct Costs: Relate directly to a product/service (e.g. raw materials).

• Indirect Costs: Cannot be directly linked to a product/service (e.g. managing director’s salary).

Page 11: Calculating Total Costs

• Formula: Fixed costs + Variable costs = Total Costs.

• Average costs can be calculated if quantity of units produced is known.

Page 12: Average Costs Formulas

• Average variable cost (AVC) = VC / Q

• Average fixed cost (AFC) = FC / Q

• Average total cost (ATC) = TC / Q

  • Note ATC is also known as AC.

Page 13: Total and Average Costs

• Total Cost: Overall cost of producing a product rises with output.

• Average Cost: Cost per unit produced = Total costs / Output.

Page 14: Importance of Accurate Cost Information

• Reasons:

  • Margin and pricing calculations.

  • Business development.

  • Sourcing new materials and hiring employees.

  • New product development.

  • Pricing and volume considerations.

Page 15: Revenue Terminology

• Various terms: Sales, Income, Turnover, Takings.

• Definition: Revenue arises from the trading activities of a business.

Page 16: Revenue Calculation

• Formula: Total Revenue = Volume Sold x Average Selling Price.

Page 17: Revenue Calculation Example

• Product Sales:

  • Blue: 5,000 units at £10/unit = £50,000

  • Red: 3,000 units at £10/unit = £30,000

  • Pink: 8,000 units at £11/unit = £88,000

  • Purple: 4,000 units at £10/unit = £40,000

  • Total Revenue = £208,000.

Page 18: Total and Average Revenue

• Total Revenue: Income from product sales increases with sales.

• Average Revenue (AR): Average income per product sold = Total revenue / Output = £208,000 / 20,000 = £10.40.

Page 19: Increasing Revenue Strategies

• Options for revenue increase:

  • Increase quantity sold (price cut or volume incentives).

  • Increase selling price (adding value).

  • Opt for both strategies.

Page 20: End of Video

Page 21: Contribution Concept

• K5: Explain contribution concept and calculate contribution per unit.

Page 22: Contribution Definition

• Contribution: Difference between selling price and variable costs (SP - VC = C).

  • Contribution funds fixed costs first, then serves as profit.

Page 23: Importance of Contribution

• Utility: Helps assess whether a product contributes to business profit.

• Essential to cover fixed costs before profit is realized.

• Contribution focuses on direct costs only.

Page 24: Contribution Calculation

• Formula: Contribution per unit = Selling Price per unit - Variable Cost per unit.

  • Positive contribution indicates that the product aids in covering fixed costs and yielding profit.

Page 25: Total Contribution Calculation

• Total Contribution:

  1. Contribution per unit x No. of units sold.

  2. OR Total sales value (£) - Total variable costs (£).

Page 26: Contribution per Unit Calculation

• Formula: Selling Price per unit - Direct cost per unit.

  • Example: Selling price = 18p, Direct cost = 7p -> Contribution = 11p.

Page 27: Example Contribution Calculation

• Product Info:

  • Selling price per unit: £30

  • Variable Cost per unit: £18

  • Units sold: 15,000.

• Total Contribution:

  • Contribution per unit = £30 - £18 = £12

  • Total Contribution = £12 x 15,000 = £180,000.

Page 28: Total Contribution vs Operating Profit

• Clarification: Total contribution does not equal total operating profit because it does not factor in fixed costs.

• Fixed Costs Calculation: Total Fixed costs = £116,000.

• Operating Profit Calculation: Contribution - Fixed costs = £180,000 - £116,000 = Operating Profit of £64,000.

Page 29: End of Video

Page 30: Specific Learning Outcomes

• K6: Profit importance for business and stakeholders.

• K7: Define and calculate gross profit and operating profit.

Page 31: Total Operating Profit Calculation

• Operating Profit Calculation:

  • Total operating profit = Contribution - Fixed costs

  • £180,000 - £116,000 = Operating Profit = £64,000.

  • Contribution per unit aids in break-even analysis.

Page 32: Importance of Profits

• Profits Utilized By:

  • Shareholders for retention and rewards.

  • Suppliers for consistent orders.

  • Customers for product availability and fair pricing.

  • Local communities for employment.

  • Employees for bonuses and pay raises.

Page 33: Income Statement Overview

• Definition: A historical record of business trading over a period (typically one year).

• Purpose: Shows profit or loss, difference between total income and total costs.

Page 34: Income Statement Variability

• Note: Prior to January 2005, the profit and loss account was the standard; now often referred to as the income statement.

Page 35: Gross Profit Calculation

• Gross Profit Formula: Sales Revenue - Direct Costs = Gross Profit

  • Example: Sales = £100,000; Direct Labour = £25,000; Raw Materials = £12,000.

  • Gross Profit = £63,000.

Page 36: Operating Profit Calculation

• Operating Profit Formula: Gross Profit - Overheads (Indirect costs) = Operating Profit

  • Example: Gross Profit = £63,000; Overheads total = £50,000.

  • Operating Profit = £13,000.

Page 37: Quiz Reminder

• Answer the question in the engagement quiz document to be marked present for attendance.