The three different types of costs are fixed cost, variable cost and total cost. For all of the diverse types of costs there are also dissimilar calculations to work out each type of revenue. Fixed cost does not change no matter how much they produce, even if the business produces 1 or 1,000,000,000 it will always stay the same. Examples of fixed costs are rent, salaries, rates and loan payments. Variable cost change with the level of production. In order to work out the total variable cost you have to times together the quantity and the variable cost. Also, to determine the total cost you have to add the fixed cost and the variable cost. The meaning of Start up cost is the money you need to start up the business. Running cost always varies because of the level of stock changes and you have to pay for workers.
In the case of Kiren and Zaiba, salaries are used as a fixed cost because they don’t change with the level of output. Heating and lighting are used as a variable cost because the variable cost change with the level of production. The sum: Fixed cost + variable cost = total cost which is 6,000 in the scenario.
The definitions for the following words are:
What is left when all costs incurred in making and selling a product are deducted from the revenue gained from that sale. It acts as the reward to the entrepreneur, usually the owner of the business, who has provided the capital. It is usually the net profit after tax which represents the surplus for the owners of the business and is paid as a dividend to shareholders. Profit maximization is seen as one of the major objectives of a business, although it is more likely to be an objective for the investors in a business, than for its managers or employees. It might be for those groups that profit acts as a constraint, while higher sales orhigher wages and salaries are more important objectives
This is the amount of sales revenue that a business earns less all the costs involved in achieving that revenue, including both direct costs and expenses. The net profit figure represents the figure for profit before taxation or a dividend are further deducted, and shows how successful a business has been in generating profits from its trading activities.
The figure obtained on the profit and loss account when the cost of goods sold is deducted from the sales revenue of a business, but it does not take into account any of the expenses of running a business such as wages, distribution costs or administration costs.
Heating and lighting £200
400 CD’s £2800
Loan repayments £290
Kiran & Zaiba analysis:
In task two I used excel to work out the break even point, at diverse costs. The fixed costs were the same because I only have done break even for one month. The quantity is going up in one hundreds. I calculated the variable cost by multiplying the quantity by 6 which came out to be going up in six hundreds. I calculated the total cost by adding the fixed cost by the variable cost; in this case it was increasing by six hundred. To calculate the sales revenue, I had to multiple the quantities by 12, which was increasing by 1200. To calculate profit or loss, I subtract sales revenue from total cost. According to the information on my table Kiran & zaiba have to sell 1000 CD’s to break even. Break even is when the cost is 6000 and the quantity is 6.
In the following table I have changed the fixed cost to 6950 because the following values increased: the rate increased to £300 also, the telephone increased to £100, advertising to £125 and the lighting and heating increased to £425.
Using the contributing method I will calculate the following data to achieve how much CD’s will be needed to break even. In order to do this I will have to use the following equation 6950 divided by 6. The sum equals 1158. So they will have to sell 1158 to break even. This means that they will have to increase sales.
Advantages of break even analysis
Disadvantages of break even analysis
Break even can be used to predict profit
It price suddenly changed it wouldn’t take it in
Break even can be used to determine financial needs
For example, If petrol prices go up the break even will not show the increase.
Keep track of profits and losses.
It is a forecast which means that the data is predicted.
Gives you ideas for selling prices (if you made a lot of money at that period of time).
It helps to calculate profits
Helps to make decisions on prices
I think that break even is very useful because:
It assists you to figure out your profit
Helps you by giving you assumptions of prices
It is extremely significant in that if you are taking into consideration to applying for a loan.
Gives you a clear impression of prices
Analysis for cash flow forecast
I will now construct the cash flow forecast
I have now prepared an annual cash flow forecast using monthly data
I have also included the loan in January. The table looks like this for a regular cash flow forecast:
The sales become irregular due to an immense amplify in downloading and sharing music. The irregular cash flow forecast should look like this:
Cash flow forecast is extremely significant and has many uses. For example, it helps the bank manager to keep up to date; it helps managers to plan ahead and it also determines if there is a problem with the cash flow by resolving the difficulty.
Regular cash flow shows:
That there is not a problem with the cash flow because the opening bank balance is always increasing, so the profit is rising.
The main objective for a cash flow forecast is to see whether there is a profit or loss. Currently, I have identified that with the regular cash flow there is not a problem because all the numbers are increasing, meaning that a profit has been achieved.
Irregular cash flow forecast shows that:
The opening bank balance starts with zero; it then rises immensely in February to 11300. Then it starts to decrease steeply all the way to December, leaving the opening bank balance drawn to a close with -37470. This is bad for the business because now they are not making a profit
The total cash inflows, starts of with 18000 in January. Then it starts to reduce in each and every month, until it comes to December where it increases to 2700 from November. This is consequently leading them to a loss.
The total cash outflows contrast from low to high in that, in January it is 6700 and then increases enormously to 9500 in December.
The Implication of the problem is that there is an increase in people who tend to download and share music. This will inevitably affect their sales. This will also consequently make Kiran and Zaiba fall to lose a profit. Because of this problem Kiran and Zaiba are making a loss of £43,920.
The implication to the problem is that, In order to reject the lost, I recommend that
The other way around this is to increase the number of quantities, in order to sell more and increase profit. Or, lower maintenance costs and launching a download website so you can attract costumers worldwide.
The documents which Kiran and Zaiba will need to sequence sales and purchasing from order to receipt of goods are:
Issues by the purchaserIssued by the seller
Delivery note- accompanies the goods. Is signed by purchaser as proof of delivery.
Sales invoice- gives full details of goods, prices, discounts, VAT
Credit note- issued if goods are returned or to adjust any over- charges on the invoice.
Statement of account- summarises all transactions and states balance owning.
Remittance advice – summarises the account for return with cheque payment
Cash receipt- issued to confirm cash payment has been received
Purchase order- lists items required and price for each.
Goods received note- lists items received.
Purchaser tells seller if any shortages or damage
Cheque or electronic transfer- to pay balance on statement
I am now going to describe the manual and electronic ways of recording financial transaction that Kiran and Zaiba could use:
Predominantly, most Kiran and Zaiba’s transactions are mostly recorded electronically because they are developed either by an electronic cash register or by computer. The advantage of recording transaction for Kiran and Zaiba indicate that any linked documents are printed mechanically. Kiran and Zaiba may want to take the alternative route by considering keeping manual records which are then kept by businesses that would not find it valuable to buy a cash register or use a computer system.
Even people who receive payments in a customer’s home- such as service engineers- are now more likely to record the transaction on a laptop than carry a receipt book with them.
Kiran and Zaiba want and need to prevent fraud because they are a minute business. To terminate these frauds they will have to have:
A thoughtful staff selection which are trustworthy to procedure which includes character references.
A “whistle- blowing” scheme where workers are compensated for reporting fraud. The system should guarantee that information is treated confidentially.
An unambiguous policy on dealing with fraud. Scam is usually considered to be “gross misconduct” (which means disgusting bad behaviour) for which workers can be fired instantaneously as part of the disciplinary procedure.
The strengths of a cash flow forecast are that:
It helps the bank manger to keep up to date
It records how much money you have
It gives you ideas to plan ahead
Demonstrates how much money you have at the present time
The forecasts of sales and cash flow, and hence crucial abundance of profit, will be vital on which the prospective bankers will assess the upcoming feasibility of the business. It follows that these forecasts will come under crucial inspection and significant judgement. The importance of cash inflows is so you distinguish how much value of money is going towards the inside of a businesses bank account at a particular time. An example for this could be: the income Kiran and Zaiba make for selling CD’s.
The strengths of break even are:
It helps you see where you have an increase or decrease in your profit.
Keeps you informed
Break even engrosses discovering what would occur if there were changes to cost of revenues. The types of questions the boss would ask are:
Is it possible for Kiran and Zaiba to increase sales by 5% and still make a profit even if sales fall?
If by reducing sales by 10% will this effect Kiran and Zaiba?
Say if Kiran and Zaiba shift of to an inexpensive property, how would this affect our profits?
There is many different ways in which, to record this information. For instance, Manual recording principally used by businesses that, tend not sense that it is advisable to buy a cash register or computer. (For example, If Kiran and Zaiba don’t sell as much CD’s then, they may find it simpler to record these manually). Also, there is an alternative route which is, to record by electronically, which means that associated documents are printed mechanically. This could be beneficial if Kiran and Zaiba are selling lots of CD’s. Cash flow indicates the amount of money received and spent over time. This is significant in that, you will then be aware of how much income is in the bank.
If Kiran and Zaiba have an enormous demand they can amplify there sales because there are not adequate CD’s. They could charge more which is better for the business because they are making more profit. But if there is too much CD’s then they could reduce prices to sell more, thus allowing them to make profits.
Just to add, the main objective for any business is to make a profit. So, Kiran and Zaiba will want to do so. To do this, Kiran and Zaiba may want to take this into consideration that they may want to reduce their sales in order to sell more and to attract more costumers.