Understanding Understanding Accounting & Financial Accounting & Financial

PlanningPlanning

For the lesson:For the lesson:

Account for what you Account for what you dodo

-and--and-

Using accounting to Using accounting to develop your finance develop your finance planplan

Part I:Part I:Costs & RevenuesCosts & Revenues

What are costs?What are costs?

CostsCosts are all the different types of expenditures are all the different types of expenditures (both big and small) of a business that are (both big and small) of a business that are necessary to keep the business running to produce necessary to keep the business running to produce the service and/or product. the service and/or product.

Fixed Costs…Fixed Costs…

“…“…a cost that remains a cost that remains unchanged in total, unchanged in total, regardless of changes in regardless of changes in the level of total activity the level of total activity or volume”or volume”

-Prof. G. Cassar-Prof. G. Cassar

Costs that remain Costs that remain constant regardless of constant regardless of how well or poorly the how well or poorly the business is doing.business is doing.

Variable Costs…Variable Costs…

“…“…a cost that changes a cost that changes directly in proportion to directly in proportion to changes in the level of changes in the level of activity or volume…”activity or volume…”

-Prof. G. Cassar-Prof. G. Cassar

Costs that cold change Costs that cold change based on how well or based on how well or poorly the business is poorly the business is doing. doing.

Examples of Fixed & Variable Examples of Fixed & Variable CostsCosts

Fixed Costs…Fixed Costs…

Costs that remain Costs that remain constant regardless of constant regardless of how well or poorly the how well or poorly the business is doing.business is doing.

* * * * * * * ** * * * * * * *

For Example…For Example…

If you have store, the cost If you have store, the cost of the rental space every of the rental space every month is a fixed cost. month is a fixed cost.

For a restaurant, the cost For a restaurant, the cost of tables, chairs or other of tables, chairs or other decorative items.decorative items.

Taxes or InsuranceTaxes or Insurance•* * * * * * ** * * * * * *

Student provide an Student provide an example…example…

Variable Costs…Variable Costs…

Costs that cold change Costs that cold change based on how well or based on how well or poorly the business is poorly the business is doing. doing.

* * * * * * * ** * * * * * * *

For Example…For Example…

If you are making t-shirts If you are making t-shirts the cost of the material. the cost of the material. The more t-shirts you The more t-shirts you make, the cost for the make, the cost for the materials will go up and materials will go up and vise-a-versa. vise-a-versa.

If you own a restaurant If you own a restaurant the cost of food.the cost of food.

* * * * * * * ** * * * * * * *

Student provide an Student provide an example…example…

What are revenues?What are revenues?““Revenues are the sales of products, merchandise and services Revenues are the sales of products, merchandise and services

that a company makes to customers due to the normal that a company makes to customers due to the normal business activities. The Philadelphia Phillies, the 2008 world business activities. The Philadelphia Phillies, the 2008 world Series Champions, generated a record-breaking $216 million Series Champions, generated a record-breaking $216 million in revenues from ticket sales, merchandise and refreshments in revenues from ticket sales, merchandise and refreshments last year.” last year.”

-Prof. G. Cassar-Prof. G. Cassar

Revenue is the amount of money the business brings in from Revenue is the amount of money the business brings in from selling its product or service. Be careful, revenue does not mean selling its product or service. Be careful, revenue does not mean

profit.profit.

For example…For example…

At a restaurant the total amount of money all the At a restaurant the total amount of money all the customers paid during dinner service.customers paid during dinner service.

The total amount everyone spent at a shopping store The total amount everyone spent at a shopping store in a given day.in a given day.

Students give an example…Students give an example…

Match UpMatch Up

CostCost RevenueRevenueWhat is the difference between Costs (fixed and What is the difference between Costs (fixed and

variable) variable)

and Revenue?and Revenue?

How do or don’t costs and revenue impact each How do or don’t costs and revenue impact each other?other?

If a business is selling If a business is selling more of a product they more of a product they are _____________ in are _____________ in variable costs.variable costs.

Regardless the fixed costs Regardless the fixed costs will ___________ .will ___________ .

If a business is selling If a business is selling more of a product they more of a product they are bringing in more are bringing in more revenue.revenue.

Part II:Part II:Keeping Track Keeping Track

of our Costs & Revenuesof our Costs & Revenues

Lets pretend we Lets pretend we have a lemonade have a lemonade stand. To being stand. To being

we need to we need to construct a table construct a table with the different with the different

variable costs, variable costs, fixed cots and a fixed cots and a

space for space for revenue.revenue.

Variable Costs

  Cups

  Lemonade Mix

  Water

   

Fixed Costs

  Pitcher

  Table

  Chair

  Table Cloth, Sign & Other Decoration

   

Revenue

  Cup of lemonade

Now put in Now put in some some

informatiinformation.on.

Variable Costs

  Cups $4 for 30 cups

  Lemonade Mix$5 for mix makes 8 quarts (256 oz)

  Water $3 for 2 gal (256 oz)

     

Fixed Costs

  Pitcher $35

  Table $50

  Chair $25

 

Table Cloth, Sign & Other Decoration $15

     

Revenue

  Cup of lemonade$1 per cup (8 oz is a cup)

What does it look like when we sell What does it look like when we sell 300 cups?300 cups?

Based on Selling 300

Variable Costs   $120

Cups $4 for 30 cups $4 x 10 $40

Lemonade Mix

$5 for mix makes 8 quarts (256 oz or 32 8oz cups) $5 x 10 $50

Water $3 for 2 gal (256 oz) $3 x 10 $30

Fixed Costs   $125

Pitcher $35   $35

Table $50   $50

Chair $25   $25

Table Cloth, Sign & Other Decoration $15   $15

Revenue   $300

Cup of lemonade$1 per cup

(8 oz is a cup)   $300