Costs and budgets

The management of costs is a very important aspect of managing financial resources. If costs are not managed effectively, it can lead to profits being damaged and the business potentially unable today its expense. Keeping within a budget, increasing income in order to cope with change and making sure that working capital is available and money and set aside for emergencies is all part of the balancing exercise. Costs managed to budget McDonald’s budget was adverse as there was a miscalculation and McDonalds managed to overspend. This is because the management team at McDonalds under budgeted on certain aspects like staffing, security and utility bills. Costs managed to budget there are two main types of costs: Fixed cost – these are costs that do not change regardless of the number of goods that sold or services that are offered. These costs include rent, insurance, salaries. Whatever McDonalds makes whether its 100 or 10,000 products, these cost must be paid. Variable cost – these are costs that change depending on McDonalds output. So if McDonalds makes a burger it will have varying requirements for amounts of bread, meat, fish, cheese and lettuce head will depend on how many burgers the make. Break –even point Businesses can use the calculations that they make of fixed costs, variable costs and sales to work out the point at which their costs equal their sales. This is known as a break-even, this is essential for McDonalds as this will work out how many products they need to produce and sell which will conclude them to know whether they are making a profit or a loss. To work out the break even you have to do a formula: BEP= Fixed Cost / Sales – Variable Costs per unit. This means that to work out break-even pint (BEP) you have to take fixed cost and divide it with the Unit contribution and take-away the variable cost per every unit. When McDonalds calculates their break-even point this would give them an understanding on how many products they need to sell before they can start to make a profit. There are two main costs that need to be managed to budget which are fixed costs and variable cost. Fixed costs are costs that do not change regardless of the number of merchandise that is sold or services that are offered. These costs are things such as rent, insurance and salaries. Regardless if the business is not making enough profit these costs have to be paid. Variable costs are the costs that change according to the output. These costs can change according to how many products are made for example MacDonald’s costs will depend on their product which is for example burgers. They will have varying requirements for the about of meat, burger buns, and so on how many burgers it makes. Budgeting is a very difficult process because it looks to give a guide to how much the business thinks it will spend in the future. Some businesses choose to use zero budgeting where the departments in a business are given no budget. But they have t ask the managers of their department for money based on what they think they will use in that year. The opposite of it is allocated budgeting this is when money is allocated for a budget and divided up into the amount of departments and the amount of people working there. The budget is normally set at the start of the financial year and the business must stick to its predictions. If the business is making more profit than they predicted that the outcome of that will be positive. Variance analysis is when a business measures the difference between what is budgeted and the actual costs or the sales revenue. If the result is better than expected than the budget is known as favourable but if the sales are lower than expected than the budget is known as adverse. A business should monitor the variances because is the business notices them early enough it can make changes to them and get back on track. Businesses can use the calculations that they make out of fixed costs, variable costs and sales to work out the point at which their costs equal their sales. This is known as break even, it shows how many products they need to produce and sell or the services they need to offer, the Business needs to get to the point where they are not making a profit or making a loss.