The Role of finance:
Business spends money on capital or revenue expenditures
Capital expenditure: cost of equipment, fixed assets, doesn’t make you money
Revenue expenditure: money used to make more money (i.e. finance on running the business)
Not enough money? Cut on expenditures. Biggest ones to cut: salaries and advertising and promotions
- See where revenue is coming from (surveys) and decide which ads to cut
Business Management Toolkit: Contribution Analysis
Used as a decision making tool to:
1. make or buy something
2. Contribution costing
3. Absorption costing
- Another example: contract or hire an employee. Contract doesn’t have the overhead costs (i.e.
- Chicken tacos are making you the most money (lowest variable cost per unit production)
Unit contribution = Price (of unit) – AVC (average variable cost). Average variable cost: cost to make taco (transport)
Total Contribution
Total contribution = TFC / unit contribution
Total fixed cost: cost of running business (i.e. rent). Total contribution tells you the minimum number of units to buy to break even
Buy and Make Decision
Cost to buy: price * quantity
Cost to make: fixed cost + (variable costs * quantity)
Qualitative factos in make or buy decisions
Benefits and Limitations to contribution costing
- Greater awareness of total cost, better pricing decisions
- You can analyse the profitability of each product + product line or department
Limitation
- Indirect costs not accounted for
- Direct and indirect costs are subjective in identifying
Absorption Cost
Tells you how much money you need to make for each product
Break-even quantity: Fixed cost / unit contribution
If it doesn’t make sense to sell 375 vegan tacos, absorption costs can tell you how many more chicken tacos you need to sell to make up for the vegan ones.
Allocation of fixed costs
Advantages and Disadvantages of Absorption Costing
Advantages
- Cost allocation is fair to multi product firms
- Better price making decisions because you know where the finances are coming from
- You can measure and analyse the profitability of different product lines
Disadvantages
- Complex and time consuming to calculate
