Finance and Accounts

Finance and Accounts

Costs
-Fixed – are not influenced by the amount produced but can change in the long run e.g., insurance costs, administration, rent, some types of labour costs (salaries), some types of energy costs, equipment and machinery, buildings, advertising and promotion costs
-Variable – vary directly with the amount produced, e.g., raw material costs, some direct labour costs, some direct energy costs
-Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)
lAverage Costs = TC/Output (Q)
–AC (unit costs) show the amount it costs to produce one unit of output on average
lMarginal Costs (MC) – the cost of producing one extra or one fewer units of production
–MC = TCn – TCn-1


Revenue
-Total Revenue – also known as turnover, sales revenue or ‘sales’ = Price x Quantity Sold
-TR = P x Q
-Price – may be a variety of different prices for different products in the portfolio
-Quantity – could be global sales


Profit
-Profit = TR – TC
-Normal Profit – the minimum amount required to keep a business in a particular line of production
-Abnormal/Supernormal Profit – the amount over and above the amount needed to keep a business in its current line of production


Occurs where Total Costs = Total Revenue
–Start-up costs – fixed costs
–Running costs – variable costs
–Revenue stream depends on price charged
–‘Low’ price – need to sell more to break-even
–‘High’ price – lower level of sales required before breaking even


Purpose of Accounts
-Provide information for stakeholders – customers, shareholders, suppliers, etc.
-Provides the opportunity for the business to monitor its own activities
-Provides transparency to enable the firm to attract investment
-Reduces the chance for fraud – not 100% successful!!


Profit and Loss Account
-Shows the flow of sales and costs over a period
-Shows the level of profit or loss made
-Shows what has been done with the profit or loss


Balance Sheet

-A snapshot of the firm’s position at a point in time
-Shows what a company owns (assets) and what it owes (liabilities)
-Balance Sheet shows what assets a company has (use of funds) and where the money came from to acquire those assets (source of funds)