tlip5035a presentation 4
Post on 18-Aug-2015
14 Views
Preview:
TRANSCRIPT
PRESENTATION 4: DEFINITIONS OF TERMS AND DATA
PRESENTATION 4 OUTLINE
The following areas are covered in this presentation:
• Budgeting for Costs, Revenues and Profits
• Translating CVP into Accounting Language
• Profit and Loss Statement
• Linking CVP to the P&L Statement
BUDGETING FOR COSTS, REVENUES AND PROFITS
Profit
• A simple but sensible assumption - the aim of most commercial
businesses is to MAXIMISE PROFITS.
• Note that not all organisations have this aim e.g. public sector
agencies, voluntary and not-for profit associations. These
organisations have different aims.
BUDGETING FOR COSTS, REVENUES AND PROFITS
Profit
• Total Revenue (TR) refers to
the total income the
business receives from the
sales of its goods and
services
Formula 1PROFIT = TOTAL REVENUE – TOTAL COST or Pr = TR - TC
BUDGETING FOR COSTS, REVENUES AND PROFITS
Profit
• For a simple business selling just one product at one price:
• TR (like total costs) increases as more products and services are
produced and sold.
• Total cost (TC) refers to the sum of all the money spent by the
business purchasing the inputs to produce its goods or services.
These costs will include:
Total Revenue = Price X Quantity
• raw materials• wages and salaries• rent• electricity, telephones etc.
• even the tea bags for the office kitchen
• More about the various types of costs later
BUDGETING FOR COSTS, REVENUES AND PROFITS
Profit
• Fixed costs are those costs that do not change as the
business’s volume of products and services change
Example:
• A company rents a
warehouse at the Port of
Brisbane
• It does not matter how many
customers they have or how
many staff are employed
• The rent does not change
• The rent is a fixed cost
BUDGETING FOR COSTS, REVENUES AND PROFITS
Profit
• Variable costs are those costs that do change with the quantity
of products or services produced by the business
Example:
• As the number of customers
at a restaurant grow and
more and more meals need
to be prepared more and
more ingredients (or inputs)
e.g. meat, seafood,
vegetables, salads and wine
need to be purchased
BUDGETING FOR COSTS, REVENUES AND PROFITS
Profit
• If the business is aiming to
maximise its profits, it will
need plans to do so
• Such plans will include
budgeting for:
− sales revenues
− costs, and
− profit
Graphically, Total Cost is shown as:
Total Cost = Fixed Cost + Variable Cost
BUDGETING FOR COSTS, REVENUES AND PROFITS
Cost Volume Profit Analysis
• Can be used to plan for future sales, revenue, cost and profit
targets. Examines the relationship between costs, revenues and
profits (or losses) the firm will have at various levels (or volume)
of production
• Allows business to calculate the level of output and sales it must
achieve to avoid a loss – this is called the BREAKEVEN POINT
BUDGETING FOR COSTS, REVENUES AND PROFITSContribution Margin
• The contribution margin refers to how much the sale of a single product
contributes to profit. It is calculated as the price less the variable cost (per
unit) of the product. It is called the contribution margin because this
margin contributes:
1. To paying off the
fixed costs (and
reducing loss)
2. Then, once the
breakeven point is
reached, towards
profit
TRANSLATING CVP INTO ACCOUNTING LANGUAGE• The accounting profession has developed different terms to describe
fixed and variable costs e.g. variable costs, direct costs, cost of
goods sold, fixed costs, indirect costs, overhead.
Cost of Goods Sold (COGS)
• COGS is the costs that go into creating the products (and services)
that a company sells. The only costs included are those that are
directly tied to the production of the products.
For example:
• The COGS for an automaker would include the material costs for the
parts that go into making the car plus the labour costs used to put
the car together.
• The cost of sending the cars to dealerships and the cost of labour
used to sell the car would be excluded.
TRANSLATING CVP INTO ACCOUNTING LANGUAGE
Overheads
• In business, overhead or an overhead expense refers to an
ongoing expense of operating a business.
• Also known as Operating Expenses e.g. rent, gas/electricity,
administrative wages, etc.
• The term overhead is usually used to group together expenses
that are necessary for the continued functioning of the business
but cannot be immediately associated with the products/services
being offered
• Overhead expenses do not directly generate profits
TRANSLATING CVP INTO ACCOUNTING LANGUAGE
Allocating Wages and Salaries
A distinction can be drawn between:
1. The wages of staff employed directly in the production of goods and
services
2. The wages and salaries of staff employed in managerial and
administrative positions
− Q. Which of these would you consider to be a variable cost?
− Q. And which would you consider to be a fixed cost?
• The numbers of staff involved directly in production are likely to
increase and decrease with changing levels of production. Therefore,
they are likely to be variable costs and are reported as part of the
COST OF GOODS SOLD in the profit and loss statement.
TRANSLATING CVP INTO ACCOUNTING LANGUAGE
Allocating Wages and Salaries
• The numbers of staff involved in managerial and administrative
positions are less likely to vary with changes in the scale of
production
• Therefore, they are likely to be considered as fixed costs and are
reported as part of the business’s OPERATING COSTS or
OVERHEADS in the profit and loss statement
• Note: This is particularly true in the contemporary Australian
context where there has been a great increase in the use of casual
labour. Increasingly, casual labour is used specifically because it
constitutes a variable cost of production
TRANSLATING CVP INTO ACCOUNTING LANGUAGE
Gross, Operating and Net Profit
We now understand that:
Profit = Total Revenue – Total Cost
Total Cost = Variable Cost + Fixed Cost
But accountants talk about:
• Gross Profit
• Operating Profit or EBIT (i.e. earnings before interest and taxes
• Net Profit or Net Income
TRANSLATING CVP INTO ACCOUNTING LANGUAGE
Gross Profit (or Sales Profit)
• The difference between revenue and the cost of making a product
or providing a service (before deducting overhead, payroll,
taxation and interest payments)
• This is like saying: Gross Profit = Total Revenue – Variable costs.
Gross Profit = Sales – Cost of Goods Sold
TRANSLATING CVP INTO ACCOUNTING LANGUAGE
Operating Profit
• Profit earned from a firm's normal core business operations
• This value does not include:
− any profit earned from the firm's investments (e.g. earnings
from other firms in which the company has partial interest),
and
− the effects of interest and taxes
• Also known as ‘earnings before interest and tax’ or simply EBIT.
TRANSLATING CVP INTO ACCOUNTING LANGUAGE
Net Profit
• Represents the number of sales dollars left after all cost of goods,
operating expenses, interest, taxes and preferred stock dividends
(but not common stock dividends) have been deducted from a
company's total revenue
• Net profit is also referred to as the bottom line, net income, or net
earnings
• This is like saying: Gross Profit = Total Revenue – Variable costs.
Net Profit = TR – COGS – Operating Expenses – other financial costs
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
TOTAL REVENUE is the revenue the company
receives from the sale of its product or service
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
COST OF GOODS SOLD are the direct costs of
producing the goods or services sold. These are also the variable costs of
production.Cost of goods sold will
include the cost of buying raw materials,
parts used in making the product, the wages of staff employed directly
in manufacturing or service delivery etc.
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
GROSS PROFIT = SALES - COGS
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
The OPERATING EXPENSES or
OVERHEADS refer to the indirect costs of the
company’s operations.These can be thought of
as fixed costs of production as they do
not vary with the number of products
produced.However, that does not mean that they can not
change for other reasons!
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
The OPERATING PROFIT is the profit earned from
a firm’s normal core business operations.
Operating Profit = Total Revenue – COGS –
Overheads
Sometimes referred to as EBIT (Earnings Before
Interest and Taxes)
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
INTEREST PAYMENTS made (for example on money borrowed from
the bank) can be substantial, but they
relate to how the company is financed rather than its day to day operations and
production of goods and services
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
TAXES are significant too, but these are taken
into account after operating profit as they do not relate directly to
the core activities or running the business or
producing goods and services for sale.
PROFIT AND LOSS STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
NET PROFITS or NET EARNINGS is what we
often call:
“THE BOTTOM LINE”
This is what the owner(s) get after all expenses,
interest and taxes have been deducted from
sales revenue.
LINKING CVP TO THE P&L STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
TR = P X Q
LINKING CVP TO THE P&L STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
TR = P X Q
COSTS OF GOODS SOLD ARE THE VARIABLE COSTS
LINKING CVP TO THE P&L STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
TR = P X Q
COSTS OF GOODS SOLD ARE THE VARIABLE COSTS
The OPERATING EXPENSES or OVERHEADS are
equivalent to fixed costs
LINKING CVP TO THE P&L STATEMENTTotal Revenue $100,000
Cost of Goods Sold ($20,000)
Gross Profit $80,000
Operating Expenses/Overheads
Salaries $10,000
Rent $10,000
Utilities $5,000
Depreciation $5,000
Total Operating Expenses ($30,000)
Operating Profit/EBIT $50,000
Interest Expense ($10,000)
Taxes ($10,000)
Net Profit $30,000
TR = P X Q
COSTS OF GOODS SOLD ARE THE VARIABLE COSTS
The OPERATING EXPENSES or OVERHEADS are
equivalent to fixed costs
OPERATING PROFITPROFIT = TR- TC
PROFIT = TR – (VC+FC)(… but not counting interest
and tax)
top related