Cost Budgeting

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Costs and Budgeting





Costs and Budgeting





Costs





Costs

• Anything incurred during the productionof the good or service to get the output

into the hands of the customer• The customer could be the public (thefinal consumer) or another business

• Controlling costs is essential to business

success• Not always easy to pin down

where costs are arising!





Cost Centres





Cost Centres

• arts of the business to which particularcosts can be attributed

• n large businesses this can bea particular location" sectionof the business" capital assetor human resource#s

• $nable a business to identify wherecosts are arising and to manage thosecosts more effectively





%ull Costing• A method of allocating indirect costs to

a range of products produced by thefirm&

' e&g& if a firm produces three products a" b"and c and has indirect costs of * million"assume proportion of direct costs of +,-for a" ..- for b and +.- for c

' ndirect costs allocated as +,- of * millionto a" ..- of * million to b and +.- of *million to c





Absorption Costing

• All costs incurred are allocatedto particular cost centres ' direct

costs" indirect costs" semi variablecosts and selling costs

• Allocates indirect costs more

accurately to the point wherethe cost occurred





/arginal Costing

• The cost of producing one e0tra

unit of output (the variable costs)• 1elling price ' /C 2 Contribution

• Contribution is the amount which

can contribute to the overheads(fi0ed costs)





1tandard Costing

• The e0pected level of costsassociated with the production

of a good#service' Actual costs – Stadard costs !

"ariace

• /onitoring variances can helpthe business to identifywhere inefficiencies or efficienciesmight lie





Total 3evenue





Total 3evenue

• #otal $e%eue ! &rice ' (uatity Sold

• &rice can be raised or lowered

to change revenue ' price elasticityof demand important here

' 4ifferent pricing strategies can be used 'penetration" psychological" etc&

• (uatity Sold can be influencedby amending the elementsof the mar5eting mi0 ' 6 s





Brea5 $ven





Brea5 $ven AnalysisCosts#3evenue

7utput#1ales

nitially a firmwill incur fi0edcosts" thesedo not dependon output orsales&

%C

As output isgenerated" thefirm will incurvariable costs 'these varydirectly with the

amountproduced&

8C The total coststherefore(assumingaccurateforecasts!) is thesum of %C98C

TC Total revenue isdetermined bythe price chargedand the :uantitysold ' again thiswill bedetermined by

e0pectedforecast salesinitially&

T3 The lower theprice" the lesssteep the totalrevenue curve&

T3

;*

The brea5 evenpoint occurs wheretotal revenuee:uals total costs 'the firm" in thise0ample" wouldhave to sell ;* to

generate sufficientrevenue to cover itscosts&





Brea5 $ven AnalysisCosts#3evenue

7utput#1ales

%C

8CTCT3 (p 2 +)

;*

f the firmchose to setprice higherthan + (say<) the T3curve wouldbe steeper 'they would nothave to sell asmany units tobrea5 even

T3 (p 2 <)

;+





Brea5 $ven Analysis

Costs#3evenue

7utput#1ales

%C

8CTC

T3 (p 2 +)

;*

f the firmchose to setprices lower(say *) itwould need tosell more unitsbeforecovering itscosts&

T3 (p 2 *)

;<







Brea5 $ven Analysis

Costs#3evenue

7utput#1ales

%C

8C

TC

T3 (p 2 +)

;* ;+

Assumecurrent salesat ;+&

/argin of 1afety

)argi o*sa*ety showshow far salescan fall beforelosses made& f;* 2 *,,, and;+ 2 *>,,"sales could fall

by >,, unitsbefore a losswould bemade&

T3 (p 2 <)

;<

A higher pricewould lower thebrea5 evenpoint and themargin of safetywould widen&





Costs#3evenue

7utput#1ales

%C

8C

T3

$urotunnel?s problem@igh initial %C&nterest on debt

rises each year ' %Crise therefore&

%C *

=osses get bigger!





Brea5 $ven Analysis

• 3emember

• A higher price or lower price does not

mean that brea5 even will e%er bereached!

• The brea5 even point depends on thenumber of sales needed to generaterevenue to cover costs ' the brea5 evenchart is N7T time related!





Brea5 $ven Analysis

•mportance of &rice +lasticityo* ,e-ad

•igher prices might mean fewer salesto brea5 even but those sales may ta5ea longer time to achieve

•ower prices might encourage morecustomers but higher volume neededbefore sufficient revenue generatedto brea5 even





Brea5 $ven Analysis

• iks o* break e%e to pricigstrategies ad elasticity

• enetration pricing ' high? volume" low? price ' more sales to brea5 even

• /ar5et 15imming ' high? price low?volumes ' fewer sales to brea5 even

• $lasticity ' what is li5ely to happento sales when prices are increasedor decreased





Budgets





Budgets• +sti-ates o* the ico-e ad

e'pediture o* a busiess or a part o*a busiess o%er a ti-e period

• Dsed e0tensively in planning• @elps establish efficient useof resources

• @elp monitor cash flow and identify

departures from plans• /aintains a focus and discipline

for those involved





Budgets

• le'ible Budgets ' budgets that ta5eaccount of changing business conditions

• 1peratig Budgets ' based onthe daily operations of a business

• 1becti%es Based Budgets Budgetsdriven by obEectives set by the firm

• Capital Budgets ' lans of therelationship between capital spendingand li:uidity (cash) in the business




Budgets

• "ariace ' the difference betweenplanned values and actual values

'&ositi%e %ariace ' actual figuresless than planned

'3egati%e %ariace ' actual figures

above planned

Documents

Cost Budgeting