PPT:- Cost Control

7/28/2019 PPT:- Cost Control

1/26

http://www.bized.co.uk

Copyright 2006 Biz/ed

Costs and Budgeting


2/26



Costs and Budgeting


3/26



Costs


4/26



Costs

Anything incurred during the productionof the good or service to get the outputinto the hands of the customer

The customer could be the public (thefinal consumer) or another business

Controlling costs is essential to business

success Not always easy to pin down

where costs are arising!


5/26



Cost Centres


6/26



Cost Centres

Parts of the business to which particularcosts can be attributed

In large businesses this can bea particular location, sectionof the business, capital assetor human resource/s

Enable a business to identify wherecosts are arising and to manage thosecosts more effectively


7/26



Full Costing A method of allocating indirect costs to

a range of products produced by thefirm.

e.g. if a firm produces three products - a,b, and c - and has indirect costs of 1million, assume proportion of direct costs of20% for a, 55% for b and 25% for c

Indirect costs allocated as 20% of 1 millionto a, 55% of 1 million to b and 25% of 1million to c


8/26



Absorption Costing

All costs incurred are allocatedto particular cost centres direct

costs, indirect costs, semi variablecosts and selling costs

Allocates indirect costs more

accurately to the point wherethe cost occurred


9/26



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)


10/26



Standard Costing

The expected level of costsassociated with the production

of a good/serviceActual costs Standard costs =

Variance

Monitoring variances can help

the business to identifywhere inefficiencies or efficienciesmight lie


11/26



Total Revenue


12/26



Total Revenue

Total Revenue = Price x Quantity Sold

Price can be raised or lowered

to change revenue price elasticityof demand important here

Different pricing strategies can be used penetration, psychological, etc.

Quantity Sold can be influencedby amending the elementsof the marketing mix 7 Ps


13/26



Break Even


14/26



Break Even AnalysisCosts/Revenue

Output/Sales

Initially a firmwill incur fixedcosts, thesedo not dependon output orsales.

FC

As output isgenerated, thefirm will incurvariable costs these varydirectly with the

amountproduced.

VC The total coststherefore(assumingaccurateforecasts!) is thesum of FC+VC

TC Total revenue isdetermined bythe price chargedand the quantitysold again thiswill bedetermined by

expectedforecast salesinitially.

TR The lower theprice, the lesssteep the totalrevenue curve.

TR

Q1

The break evenpoint occurs wheretotal revenueequals total costs the firm, in thisexample, wouldhave to sell Q1 to

generate sufficientrevenue to cover itscosts.


15/26



Break Even AnalysisCosts/Revenue

Output/Sales

FC

VCTCTR (p = 2)

Q1

If the firmchose to setprice higherthan 2 (say3) the TRcurve wouldbe steeper they would nothave to sell asmany units tobreak even

TR (p = 3)

Q2


16/26



Break Even Analysis

Costs/Revenue

Output/Sales

FC

VCTC

TR (p = 2)

Q1

If the firmchose to setprices lower(say 1) itwould need tosell more unitsbeforecovering itscosts.

TR (p = 1)

Q3


17/26



Break Even Analysis

Costs/Revenue

Output/Sales

FC

VC

TC

TR (p = 2)

Q1

Loss

Profit


18/26



Break Even Analysis

Costs/Revenue

Output/Sales

FC

VC

TC

TR (p = 2)

Q1 Q2

Assumecurrent salesat Q2.

Margin of Safety

Margin ofsafety showshow far salescan fall beforelosses made. IfQ1 = 1000 andQ2 = 1800,sales could fall

by 800 unitsbefore a losswould bemade.

TR (p = 3)

Q3

A higher pricewould lower thebreak evenpoint and themargin of safetywould widen.


19/26



Costs/Revenue

Output/Sales

FC

VC

TR

Eurotunnels problemHigh initial FC.Interest on debt

rises each year FCrise therefore.

FC 1

Losses get bigger!


20/26



Break Even Analysis

Remember:

A higher price or lower price does not

mean that break even will never bereached!

The break even point depends on thenumber of sales needed to generate

revenue to cover costs the break evenchart is NOT time related!


21/26



Break Even Analysis

Importance ofPrice Elasticityof Demand:

Higher prices might mean fewer salesto break even but those sales may takea longer time to achieve

Lower prices might encourage more

customers but higher volume neededbefore sufficient revenue generatedto break even


22/26



Break Even Analysis

Links of break even to pricingstrategies and elasticity

Penetration pricinghigh volume,low price more sales to break even

Market Skimminghigh price lowvolumes fewer sales to break even

Elasticity what is likely to happento sales when prices are increasedor decreased?


23/26



Budgets


24/26



Budgets Estimates of the income and

expenditure of a business or a partof a business over a time period

Used extensively in planning Helps establish efficient use

of resources

Help monitor cash flow and identify

departures from plans Maintains a focus and discipline

for those involved


25/26



Budgets

Flexible Budgets budgets that takeaccount of changing business conditions

Operating Budgets based onthe daily operations of a business

Objectives Based Budgets - Budgetsdriven by objectives set by the firm

Capital Budgets Plans of therelationship between capital spendingand liquidity (cash) in the business


26/26


Budgets

Variance the difference betweenplanned values and actual values

Positive variance actual figuresless than planned

Negative variance actual figures

above planned

PPT:- Cost Control

Documents

Transcript of PPT:- Cost Control