© Boardworks Ltd 2008 1 of 20 Costs, Revenue and Profit for Business Organizations Unit 3:...

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Costs, Revenue and Profit for Business OrganizationsUnit 3: Investigating Financial Control

3.1 Costs, Revenue and Profit for Business Organizations

Unit 3: Investigating Financial Control



Contents

Teacher’s notes included in the Notes Page

Flash activity (these activities are not editable) Extension activity Web addresses Sound

Printable activityKey skills

For more detailed instructions, see the Getting Started presentation



Business Costs


Start-up costs

Fixed costs

Variable costs

The difference between fixed and variable costs

Operating costs:

In this section, you will consider the types of costs businesses incur when they start up.


Starting a new business


Operating costs are the costs involved once the new product or service has been launched, in order to continue its production. These are payable for as long as the product or service is available.

Start-up and operating costs

When a business launches a new product or service, it needs to budget for start-up and operating costs.

Start-up costs are one-off costs paid before a new product or service is introduced.

These costs must be estimated in advance, in order to work out if a product or service will be profitable.


Start-up costs


Examples of start-up costs

staff recruitment and training costs

Examples of start-up costs include:

new buildings or extensions to buildings

new machinery, vehicles or equipment

researching the business’s target market

initial advertising for the new business

initial stock for the new business.

initial (first premium) insurance payments


Case study: start-up costs

Fred Snapper is thinking of opening a small fish and chip shop near the seafront in the town of Barryport.

How many different potential start-up costs can you think of that Fred will have to consider?

As this is Fred’s first shop, there will be a number of start-up costs he will have to consider to get the business up and running.

Deep Fried Fred’s


Case study: start-up costs


Operating costs


Examples of operating costs

Examples of operating costs include:

rent

wages/salaries

maintenance

loan repayments

interest on loans

communications (telephone, etc.)

mortgage repayments

advertising

stock

equipment

stationery

insurancepayments

utilities(electricity, gas, water, etc.)

travel expenses (petrol, MOT, insurance, etc.).


Case study: operating costs

Deep Fried Fred’s

In addition to start-up costs, Fred knows that once his new business is established, he will incur a number of operating costs.

Fred will need to consider all the operating costs he must pay to keep the shop up and running.

Working in groups, discuss the sorts of operating costs Deep Fried Fred’s will have.


Case study: operating costs


Start-up or operating cost?


Operating costs: fixed costs

Operating costs fall in to two categories: fixed costs and variable costs.

Fixed, or indirect costs are incurred no matter how many sales a business receives.

For example, Deep Fried Fred’s receives much more custom in the summer when people are on holiday than it does in the winter.

Can you think of any other examples of fixed costs?

However, its fixed costs, for example, rent on the shop

and loan repayments, remain the same all year round.


Operating costs: variable costs

Unlike fixed costs, variable, or direct costs are directly affected by the level of business activity.

For example, if Deep Fried Fred’s sold 20 portions of fish and chips then it would need twice as much stock than if it had sold 10 portions.

Can you think of any examples of fixed and variable costs?

Can you think of any other examples of variable costs?


Calculating variable costs

As different products have different variable costs, each one has to be worked out separately. Businesses can calculate their variable costs using the following formula:

Total variable cost = variable cost of each product x number produced

For example, it costs Fred Snapper £2.00 for the ingredients and cooking materials to make a portion of cod and chips. If he sells 12 portions that day, then the total variable cost would be £24.00.

If Fred were to sell 25 portions of fish and chips, what would the total variable cost be?


Fixed or variable cost?


Total costs

It is important for businesses to know their total costs as this allows them to gain a true picture of how much is being spent.

Total costs can be worked out using the following formula:

Total costs = fixed costs + variable costs

Fred Snapper has worked out that his fixed costs are £34,000 and that his variable costs come to £45,000.

Calculate the total costs for Deep Fried Fred’s.


The importance of accurate estimations

Sometimes businesses underestimate costs for a new venture, which can have a very serious effect on its progress.

What would be the effect on a smaller business if costs were underestimated?

However, because of financial and legal difficulties, it didn’t open until March 2007 and the total final cost for the project was £757 million, more than double the original estimate.

The new Wembley Stadium is a good example of this.

Originally the project was supposed to cost £326.5 million and open in May 2006.

© Boardworks Ltd 2008 1 of 20 Costs, Revenue and Profit for Business Organizations Unit 3:...

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