Fixed costs are costs that the business have to pay that don’t change over a short period of time. As the product sale or service increases the costs stay the same. The same amount is paid regardless of the level of production.
Fixed costs can include: the rent charge, electricity bills, gas bills, telephone bills, advertising costs or insurance prices.
Variable costs are costs that they business have to pay but it is possible that they will change as the output increases. Variable costs can include: raw materials, delivery costs or packaging costs.
Businesses should aim to break even to ensure they are going to survive in the future. Break-even is where the business doesn’t make enough sales to make a profit but they make enough sales to avoid making a loss. The point of break-even is shown on a graph that businesses produce to see how well they are doing financially.
The below diagram shows a break-even chart. http://www.bbc.co.uk/schools/gcsebitesize/business/finance/profitabilityrev2.shtml
To calculate break-even:
Break-even point = fixed costs
(unit selling price – variable costs)
The calculation of break-even tells you how many units of a product you will need to sell in order to break-even.
A budget is like a plan that businesses make. They plan it on their predictions of what they think is going to happen for them in future months / years and is a estimate of expected income and expense for a a certain period in time. It gives the business an idea of their financial situation and helps them to track their money.
‘Name It Ltd’ use budgets for several reasons, these reasons include:
ï¿½ ‘Name It Ltd’ will have enough money to buy in enough supplies for their sales because they would’ve been tracking their money income and outcome.
ï¿½ Suppliers give discounts when a business pay them on time, having a budget will allow ‘Name It Ltd’ to be able to afford to pay straight away. Paying on time also helps ‘Name It Ltd’ to avoid paying interest, getting a bad credit rating and possible bankruptcy.
ï¿½ They will be able to save money for the use of retained profit if they have a bad month. They will also be able to save money for contingencies.
ï¿½ They will have enough money to make investments if that is what they need to do.
ï¿½ Budgeting will also help ‘Name It Ltd’ to expand and develop their business in the future.
What control / budget does ‘Name It Ltd’ need to do?
‘Name It Ltd’ need to control and budget their spending. They need to keep a track off all money that is going out of the business. These expenses could include staff wages, rent for their offices or other buildings, and raw materials.
They also need to keep a track of any of their income, for example sales made.
‘Name It Ltd’ also need to take into account any money they will have coming in or going out of the business in future months.
They need to set themselves a maximum amount of money to spend each month so they don’t run into debt.
Variance calculations are the difference between the budget a business had set and what actually happened in practice.
‘Name It Ltd’ have variances in their budgets. I will give some examples.
‘Name It Ltd’ put a budget on their raw materials as ï¿½34,600 however they ended up spending ï¿½42,000 on their raw materials for 2010. This gives them the variance of ï¿½7,400 which shows that the business did not stick to their budget as they exceeded it.
They put a budget of ï¿½1,300 on their electricity but actually ended up spending ï¿½2,000 in 2010 this means their variance was ï¿½700 which also shows that ‘Name It Ltd’ has not stuck to their budget, this means they could face possible bankruptcy.
‘Name It Ltd’ put a budget of ï¿½12,000 on their rent for 2010, they ended up spending ï¿½12,000 which meets their budget without going over it. This is what the business should be aiming for in order to control their costs and reduce the risk of their business failing.