Transcript GCSE Accounting

A2 Accounting
Unit 1
Lesson 1
Classification of Costs
By the end of this lesson
You
will
Be able to
Classify costs in relation to
output and time, or
product
Know why
firms need
to
understand
their costs
Why do firms need to understand costs?
Profit
=
Revenue
-
Costs
So, firms need to understand their
costs if they wish to improve
their profit
Costs can be classified in relation to
Output and Time
Long run
Short run
Scale of
operations
can be
changed
Scale of operations
cannot be
changed
Fixed
Variable
Do not vary with
output in the
short run
Do vary directly
with output in
the short run
Product
Do change with
production
Direct
Indirect
Can be
directly
related
to
product
or
service
Can be
directly
related to
product
or service
Revising Manufacturing Accounts
Prime Cost =
Cost of materials consumed + direct costs
(e.g. labour/power)
Cost of finished goods =
Prime cost + factory indirect (or overhead) expenses = or
– adjustment for work in progress
In costing the product, the main way in which costs are
analysed above is direct and indirect
Costs, revenue and profit
Total Cost =
Fixed Cost + variable cost
Profit = total revenue – total costs
Profit = total revenue – (fixed costs + variable costs)
There are a number of costing techniques that use fixed
and variable costs.
Break even
analysis
Absorption
costing
Marginal
Costing
Fixed Cost shown by graph
Cost in £
FC
0
Number of items made (Output)
As the level of output increases, the fixed costs stay exactly the same
Activity-1
Sarah Reavenall
operates two
hairdressing
salons, one in
Bromsgrove and
the other in
Redditch
Rent
Insurance
Cleaning
Staff salaries …could
all be fixed costs
Explain why!
In your book, write
down 4 examples
of costs that are
likely to be fixed
for this business
Do fixed costs stay the same
irrespective of the level
of output, even where
there is a massive rise in
the level of output?
Think in terms of the Rent
cost for Sarah’s business
Step change in Rent Costs
Cost in £
FC
0
Number of items made (Output)
As the salon becomes more popular, additional accommodation needs to
be rented. This will cause a “step” in the rent cost. Further popularity can
result in another “step” etc
Variable Cost shown by graph
Cost in £
VC
0
Number of items made (Output)
As the level of output increases, so does the variable cost
Activity-2
Sarah Reavenall
operates two
hairdressing
salons, one in
Bromsgrove and
the other in
Redditch
Lotions and other
materials used
Laundry costs to wash
towels …could all
be variable costs
Explain why!
In your book, write
down 2 examples
of costs that are
likely to be
variable for this
business
In some cases, costs have
both an element of fixed
and variable cost about
them
e.g. electricity may be fixed
for heating/lighting but
variable for power to
hairdryers
For Sarah’s Salon
For a hairdressing business most costs will be FIXED.
However, there will be some variable costs.
Total Costs = fixed costs + variable costs
This can be shown by graph on the next slide
Sarah’s Salon
2. What is the total cost of 2000 hair do’s?
3. What is the variable cost of 2000 hair do’s?
Cost in £
40 000
TC
30 000
FC
0
2000
Number of hair do’s (Output)
1. Why does Sarah have a fixed cost of £30 000 at zero output
For Sarah’s Salon
Once we know the TOTAL COSTS we can find Sarah’s
BREAK EVEN POINT (BEP)
Sarah will break even when sales (total revenue)
equals total costs
This can be shown by graph on the next slide
Sarah’s Salon Break Even Point
2. What is Sarah’s break even output?
Cost in £ 50 000
TR (sales)
40 000
TC
30 000
FC
0
1500
Number of hair do’s (Output)
2000
1. Why does Total Revenue (Sales) start at zero output?
For Sarah’s Salon
Sarah’s break even point can be worked out not only by
CHART but also by CALCULATION
There are 2 formulae
needed to work out
Sarah’s BEP
First we need to find the
CONTRIBUTION made
towards the FIXED COSTS
and PROFIT of Sarah’s
business
Contribution = Selling price – Variable cost
Once we know the contribution, we can calculate BEP
Break Even Point (BEP) = Fixed Costs
Contribution
Calculate Sarah’s BEP
If Sarah charges £25 per hair do, has fixed costs of £30
000 and variable costs of £5 per hair do. How many
hair do’s will she need to break even. Using the 2
formulae on the previous slide show your calculation of
Sarah’s BEP
How does your answer compare with that given on
the graph you looked at earlier?
Homework
Please do the 3 questions from A2 Unit 7 Worksheet 1
for our next lesson
Make sure all the activities in this lesson have been
completed before you do the homework
This includes the Lesson summary on the final slide
Summary
Work with your partner on any question you are not
sure of …otherwise write your answer in your
book
1. Define fixed cost and variable cost
2. What is a semi-variable cost?
3. Under what circumstances could total cost be £40000
at zero output?
4. How much profit is earned at the BEP?
5. What does CONTRIBUTION mean?
6. Give the formula to calculate the BEP