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29 & 30 (BUDGETS- forecast of the income for a business over a given…
29 & 30
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BREAKEVEN-units not £
- This is the point at which total revenue is equal to total costs and cost have bee covered
- The output is the number of items tat a business must sell to reach this point
- Managers use breakeven for a number of reasons such as deciding whether a business is profitable, decide how many sales are needed to make a profit and to support a business plan
:check:Clear demonstration of important financial information
:check:Useful management tool to predict changes before implemented
:red_cross: Its predicted
:red_cross:Ignores changes in variables costs or selling price as items are bought or sold in larger quantities
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VARIANCES
- A variance is therefore the difference between the actual income, expenditure or profit and the figure that had been budgeted
Interpreting variances
- Adverse variance is one that is bad for the business
- Favourable variance is one that is good for the business
Analysing variances
- A negative variance is not always bad
- An increase in sales can also be due to inflation or tax not actual sales (depends upon)
- Variances can be cause by seasonality,advertising etc (depends upon)
Causes of changes in variances
- Action of competitors eg lower prices set by them less sales for us
- Action of suppliers eg if they offer a discount then more stock
- Changes in economy eg interest rate down then people spend more so more sales
- Internal inefficiency eg demotivated team then low sales
- Internal decision making eg change supplier means cost could be reduced
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Analysing revenue data:
Not being met could be due to....
- prices too high and not selling enough
- Lack of advertising
- Quality issues
- Prices too low
Analysing expenditure data:
Expenditure budgets not being met could be due to.....
- Lack of cost control
- Holding too much stock
- Poor motivation of staff
Analysing profit data:
Profit budgets not being met could be die to....
- High expenditure
- Low revenues
SETTING BUDGETS
:check: Quantifiable target against which actual outcomes can be measured eg is sales target is achieved
:check:Informs decision making eg what are priorities
:red_cross:Potential conflict eg ST vs LT objectives
:red_cross:May be restrictive with budget eg opportunities may be missed
:red_cross: Time consuming to set and monitor
Breakeven charts
- Fixed costs stay the same and are therefore a straight line
- Variable costs change in relation to the number of items produced and therefore start at 0 and slope upwards
- Total costs are VC+FC and therefore start at the point of FC and then slope upward at the same gradient as VC
- Total revenue increases with the amount of units sold and therefore starts at 0 and slopes upwards
Margin of safety-units
- The level of output in excess of the breakeven point
- The smaller the margin of safety, the less flexibility the business has to deal with a change in circumstances
Why is contribution useful?
- See whether a product etc is helping the company make a profit
- Calculate how long it will take an individual product to pay off fixed costs
- Used to assess whether new orders can be taken on
- used to predict impact of future selling price or cost