Break even point = fixed costs / selling price per unit - variable cost per unit

The break even point shows the point where total costs are exactly the same as total revenue, so the business is neither making a profit or a loss

it assumes the business is a single product business. makign a B.E.C for every product is timeconsuming

It assumes that the total revenue and total cost lines are linear and does not consider fluctuations it consumer spending patterns

What a Break Even Chart shows:

• the profit made at a particular level of output
• Where losses of made at levels of output below the breakeven point
• Where profits are made at levels of output above the breakeven point
  -The relationship between fix costs and variable costs as output rises

The purpose of budgets:

• planning: plan for the future and anticipate problems
• control and monitoring: management can set objectives and targets.
• efficiency: can give financial control to lower levels of management who can make decisions at their point in the organisation
• motivation: acts as a motivator

Types of budget:
- zero based budget: where costs cant be justified, no money is allocated into the budget.

• Advantages: reduces unnecessary costs, encourages managers to look for alternatives
• Disadvantages: time consuming, needs skillful decision making
  

Variances:

• Favourable variances occur when the actual figures are better than the budgeted figures.
• Adverse variances occur when actual figures are worse than budgeted figures

Difficulties of budgeting:

• setting budgets: conflicts between departments with what budget to set, inaccurate data
• manipulation: manipulation with budgeting can motivate staff in the short term, but may not meet objectives in the long term
• motivation: unrealistic budgets demotivate staff

Formulas:

• Gross profit = Revenue - Cost of sales
• Operating profit = Gross Profit - Operating expenses

• Net Profit = Operating profit - interest

  
  

• Gross profit margin = (Gross profit / revenue) x 100

• Operting Profit margin = Operating profit / revenue) x 100
• Net profit margin = (net profit before tax / revenue) x 100
  

Statement of Comprehensive Income: shows the inflows and outflows of a business during the financial year. It is used to calculate gross profit, operating profit and net profit

Ways to improve profitability:

• rising prices
• lowering costs

Distinction between profit and cash:

• profit is the amount of money left over after all expenses are paid
• cash is the amount of money currently or soon to be available

Formulas:

• Current ratio = current assets/current liabilities
• Acid test ratio = current assets - inventories/current liabilities
• Working Capital = current assets - current liabilities

The Margin of Safety shows how much sales could fall before the business makes a loss

How to manage working capital:
Working capital is the amount of money needed to pay for the day-to-day trading of a business. It is used to pay expenses such as wages, electricity and gas, and to buy components to make products. It is the money left over after all current debts have been paid.

• If it is a large business they will need large amounts of work in capital
• If a business doesn’t carry enough stocks of raw materials it may find that production is halted, therefore it might be unable to fulfil its orders on time.
• If there is not enough cash in the business it might not be able to pay bills on time

(current output / maximum output) x 100

Advantages:

• can take on future demand
• less stress in the workplace
• have time to maintain machinery

Advantages:

• average costs are lower due to EOS, and it is spread out over more units of output
• job security = motivation
• good reputation

Disdavantages:

• heavy workload = mistakes
• not flexible

Ways to improve capacity utilisation:

• rationalise: sell unused assets/machinery/offload staff/mothball machinery
• increase sales
• outsourcing: hire another business to do work that used to be done 'in-house'
• move to smaller premises