Marginal Cost Presentation Ready

8/14/2019 Marginal Cost Presentation Ready

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Brought to you by: Huzaifa Abdullah

BROUGHT TO YOU BY HUZAIFA ABDULLAH


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Costs and BudgetingCosts and Budgeting

BROUGHT TO YOU BY HUZAIFA

ABDULLAH


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Costs and BudgetingCosts and Budgeting



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CostsCosts



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CostsCosts

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 tobusiness success

Not always easy to pin downwhere costs are arising!



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Cost CentresCost Centres



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Cost CentresCost 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



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Full CostingFull Costing

A method of allocating indirect costs to arange of products produced by the firm. e.g. if a firm produces three products - a, b, and c

- and has indirect costs of 1 million, assumeproportion of direct costs of 20% for a, 55% for band 25% for c

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



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Absorption CostingAbsorption Costing

All costs incurred are allocatedto particular cost centres directcosts, indirect costs, semi variablecosts and selling costs

Allocates indirect costs moreaccurately to the point where

the cost occurred



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Marginal CostingMarginal Costing

The cost of producing one extra unit

of output (the variable costs) Selling price MC = Contribution

Contribution is the amount which cancontribute to the overheads (fixedcosts)



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Standard CostingStandard Costing

The expected level of costsassociated with the productionof a good/service

Actual costs Standard costs =Variance

Monitoring variances can helpthe business to identifywhere inefficiencies or efficienciesmight lie



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Total RevenueTotal Revenue



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Total RevenueTotal Revenue

Total Revenue = Price x Quantity Sold

Price can be raised or loweredto change revenue price elasticity

of 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



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Break EvenBreak Even



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Break Even AnalysisBreak Even Analysis

Costs/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.



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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



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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



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Break Even Analysis

Costs/Revenue

Output/Sales

FC

VC

TC

TR (p = 2)

Q1

Loss

Profit



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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.



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Costs/Revenue

Output/Sales

FC

VC

TR

Eurotunnels problemHigh initial FC.Interest on debt

rises each year FCrise therefore.

FC 1

Losses get bigger!



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Remember:

A higher price or lower price does notmean 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!



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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 morecustomers but higher volume neededbefore sufficient revenue generatedto break even



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Links of break even to pricingstrategies and elasticity

Penetration pricing high volume,

low price more sales to break even Market Skimming high price low

volumes fewer sales to break even

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



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BudgetsBudgets



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BudgetsBudgets

Estimates of the income andexpenditure 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



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BudgetsBudgets

Flexible Budgets budgets that takeaccount of changing business conditions

Operating Budgets based on

the daily operations of a business Objectives Based Budgets - Budgets

driven by objectives set by the firm

Capital Budgets Plans of the

relationship between capital spendingand liquidity (cash) in the business



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BudgetsBudgets

Variance the difference betweenplanned values and actual values Positive variance actual figures less

than planned

Negative variance actual figuresabove planned


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Marginal Cost Presentation Ready