What is Job Costing?
Job Costing is the process of calculating the cost of completing a job in order to determine a price that customer will be happy to pay and will also enable the business to make a profit.
A business will breakeven when…
it does not make a profit or a loss.
Total Revenue is the same as Total Costs.
Total Revenue is…
the amount of money a business makes from selling its goods and/or services.
Fixed Costs are…
the expenses a business incurs which do not change with output.
Name 2 examples of fixed costs.
Rent
Insurance
Advertising
Variable Costs are…
Expenses that chance according to the level of output. The more the business produces the higher the variable costs will be.
Total Costs =
Fixed Costs + Variable Costs
Why would a business use a Cash Budget?
A cash budget will show the amount of cash available to business. This will help a business ensure that it has enough cash to pay expenses such as rent, electricity, suppliers and wages.
A cash budget will show when money will come into and out of a business and where the money has come from and how money will be spent.
The reason most businesses fail is because they do not manage their cash and are unable to pay their expenses quickly and a cash budget will allow a business to keep track of the availability of its cash.
What is liquidity?
This is the availability of cash a business has. `
Define the following terms involved in a cash budget.
Opening Balance
Receipts
Payments
Opening Balance is the amount of money available to a business at the start of the month.
Receipts is the cash paid into the business for the month.
Payments is the cash paid out by a business during the month.
What is the purpose of a cash budget?
A cash budget will be used by management to ensure effective planning and control and help with decision making. A cash budget will:
- Highlight periods when a negative bank/cash balance is expected.
- Highlight when surplus cash will be available for investment
- Allow corrective action to be taken for expected overspending
- Help to avoid liquidity problems by allowing the business to secure short term finance such as overdrafts, bank loans etc.
This allows a business to anticipate problems and identify solutions before they have a negative effect on the business.
Name 3 things that could cause a business to have cash flow problems.
- Low Sales
- Too much money tied up in stock
- Buying stock that does not sell quickly
- Borrowing costs are high due to high interest rates
- Borrowing more than the business can afford to repay
- The owners withdraw too much money from the business
- Customers not paying within agreed time limits
- Allowing customers too much credit
- Purchasing assets such as vans, computers or machinery when the business cannot afford it
- Suppliers only offer a short period of credit
- An increase in expenses
Name 3 ways a business can resolve cash flow problems.
- Increase advertising to make customers aware of products/services.
- Offer discounts to customers who pay quickly
- Offer discounts to customers who pay upfront
- Reduce borrowing by investing personal savings into the business
- Sell unnecessary assets
- Sell assets and lease them back
- Negotiate trade credit with suppliers
- Arrange an overdraft or loan from the bank in advance
- reduce costs by cutting waster and increasing efficiency.
Name the two types of profit a profit statement shows.
Gross and Net Profit
How do you calculate the Gross Profit?
Sales income less (take away) the cost of purchasing stock.
How do you calculate Net Profit?
Gross Income less (take away) expenses.
Name 2 ways a business can increase sales revenue.
- Increase Advertising
- Short Term Promotions such as Buy One Get One Free
- Expanding channels of distribution (Where they sell their products - increasing size of market)
Name 2 things a business can do to reduce costs.
- Find cheaper suppliers
- Reduce number of employees
- Reduce number of hours worked by employees (eg overtime)
- Find a cheaper supplier of utilities (electricity, gas etc.)
- Buy stock in bulk to receive discounts
- Use Just in Time stock control
