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Startup costs

Business startup costs for dress shop:

- Initial stock of materials

- Sewing Machine

- Rent deposit on a small industrial space/unit

- Initial stock of packaging

- Pay for design and printing of first batch of business cards

- Cost of designing and production of signage (signs)

Startup costs definition:

Costs that the business will need to pay out to get the business up and running - often paid once.

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Running costs

Running costs for dress shop:

- Utilities (Electricity bills, gas, water and phone/broadband)

- Monthly rent on the industrial unit

- Staff wages - Paid weekly or monthly

- Raw materials - Silk and fabric

Running costs definition:

Costs that are paid out once the business is up and running - usually on a weekly or monthly basis.

[Running cost means the same as operating cost in an exam]

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Fixed costs

Fixed costs definition:

The costs that remain the same even when sales fall or increase. Fixed costs are costs that stay the same no matter how much of a product or service is produced over a period of time e.g. annually.

Fixed costs:

- Utilities (bills)

- Advertising

- Staff wages

- Car insurance

- Leafleting

- New equipment/repairs

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Direct and indirect costs

Direct cost definition:

Direct costs are teh costs that can be linked to a product such as the raw materials and laybour used to make it.

Indirect cost definition:

Indirect costs are often also called overheads and are the costs that are required for a business to operate but are not directly related to a specific product

Indirect costs:

Bricklayer: Cement mixed, tools, clothes and credit

Hair dresser: Straightners and magazines

Chef: Radio, knives and uniform

Other indirect costs: Rent, insurance, electricity, wages (if not making product), advertising and training

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Variable costs

Variable cost definition:

Variable cost is the total running cost minus the fixed costs. Costs that vary with the amount that is produced or sold over a period of time.

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Calculations

[Total costs = Fixed costs + Variable costs]

[Revenue = Price per unit x Number of units sold]

[Profit = Total revenue - Total costs]

[Break even = Fixed costs / (Selling price per unit - Variable cost per unit)]

[Total inflow - Total outflow = Net profit]

[Total liabilities = long term liabilities + current liabilities]

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Revenue and profit

Revenue definition:

Revenue is what the business earns when it sells a product or service. Revenue can also be called income, sales revenue, turn over and takings.

Profit definition:

Profit is what a business has left over after it has paid all of its total costs. If thet total revenue is not high enough to pay their costs the business will not be making a profit.

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Break even and margin of saftey

Break even definition:

The contribution cost earned from a business selling a product will cover the total costs if the business sells enough products. If the business sell the exact amount of products required to pay there total costs, the business neither makes a profit or loss so breaks even.

[Break even point is products required to break even not total revenue]

[If fixed cost or variable cost change the break even will change]

Margin of safety:

The margin of saftey is every products contribution cost sold after the break even

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Direct costs and expenditure

Direct cost is a cost that can be directly associated with the production of a good or service.

Expenditure is any cost paid out by the business. In the case of a Salon, expenditure would be staff wages and rent. However wages can vary, with the number of customers served, making this also a variable cost. Rent would be paid every month regardless of the number of customers served, making this also a fixed cost.

If revenue is higher than expenditure, the business will make a profit. The business needs to control its expenditure carefully, and ensure that it earns enough to atleast break even.

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Budgeting and budgetary control

[Cash in = Cash comming in]

A budget is a plan for the future that identifies how the business plans to spend its revenue and how any expenditure will be financed.

Budgeting will identify if the business can just continue as it is or whether it needs to review sales or costs.

Budgeting will identify if the business is in a position to make changes or expand.

Budgetary control: Check actual business performance against budget plans.

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Cashflow forecasting

Cash flow forecasting refers to the flow of money going in and out of a business e.g. cheques, electronic transfer and direct debit.

The benefits of cash flow forecasting:

- Planning for success

- The business uses the cash flow forecast to ensure that it will be able to pay its bills every month over the next 6 months to 1 year

- Where the business identifies that there might be a negative closing balange - it could arrange an overdraft to cover that month or arrange another loan

- If a business has a persistent (on going) cash flow problem it is likely to fail

- If the cash flow is very healthy or if the closing balance is high every month the business could use that cash to invest and expand

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Deficit and Surplus

Deficit definition:

Not enough money to pay bills (negative revenue)

Surplus:

What a business has in its bank (positive revenue)

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Fixed assets and expenditure

Fixed assets = keeping for number of years e.g. factory, van and machines. Most fixed assets are startup costs for a business but not always.

Fixed assets:

A new car

Equipment

Furniture

A warehouse

Computer

Expenditure:

Tax for car

Petrol

Heating and lighting

Postage

Rates (council tax)

Cleaning costs

Supervisor wages

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Income statement layout

                                                    £

Revenue

- Cost of sales

Total (Gross profit):

Expenditure

- Wages

- Insurance

Total expenditure:

Net profit:

Opening balance:

Closing balance:

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Assets and liabilities

Type 1: current assets

What the business owns now but not in 12 months time as current assets constantly change e.g. bank, case, stock and debtors

Tipe 2: Fixed assets

What the business owns now and will still have for next year probably longer e.g. premises, equipment, fixtures and fittings and a van

Type 3: Current liabilities

These are owed now but will not be owed in 12 months e.g. creditors (who want their money in next month or two) and bank overdraft

Type 4: Long-term liabilities

These are liabilities the business owes now and will still owe in 12 months and probablt longer e.g. capital (as the ower has invested money for many years) and morgage (long-term loan on the premises)

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