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• Module overview
• 1. Introduction to budgets
  • 1.1 Introduction to the Budget Process
  • 1.2 Budget types
    • 1.2.1 The Budget Guidelines
    • 1.2.2 The Sales Budget
    • 1.2.3 Budget for Operating Expenses
    • 1.2.4 Profit Budget
    • 1.2.5 Cash-Flow Budget
    • 1.2.6 The Financial Position Budget
    • 1.2.7 Additional Types of Budgets
    • 1.2.8 Additional Budgeting Techniques
  • 1.3 The budget process and its objectives
  • 1.4 Budgets for performance management
    • 1.4.1 Master budget

• 2. Planning the budget

  • 2.1 Planning the Budget
    • 2.1.1 Business income
    • 2.1.2 Visual representation of sales and budgets
    • 2.1.3 The break-even point
    • 2.1.4 Contribution margin

• 3. Controlling the budget

  • 3.1 Controlling budgets
    • 3.1.1 Variance analysis
    • 3.1.2 Taking action to achieve the objectives of the budget
    • 3.1.3 Resource acquisition and usage

• 4. Introduction to Financial Management

  • 4.1 Business Objectives
    • 4.1.1 Maximising profit
    • 4.1.2 Maximising wealth
  • 4.2 Ethics and conflicts in business
    • 4.2.1 The dilemma of ethics in finance, investment and accounting
  • 4.3 Financial Managers
    • 4.3.1 Financial information and objectives
    • 4.3.2 Accounting, the financial information system
  • 4.4 The finance function
    • 4.4.1 Business and financial calculations

• 5. Elements of Business and Financial Management

  • 5.1 Business Structures
    • 5.1.1 Sole proprietors
    • 5.1.2 Partnerships
    • 5.1.3 Corporations and companies
  • 5.2 Reporting financial data and information
  • 5.3 Financial reports
    • 5.3.1 Statement of financial performance (profit and loss statement)
  • 5.4 Capital Markets
    • 5.4.1 Capital Markets
  • 5.5 Regulation and financial institutions
    • 5.5.1 Interest rates, supply and demand and market efficiency
  • 5.6 An overview of taxation implications

• 6. Obtaining Funds: Sources of Long Term and Short Term Finance

  • 6.1 Finance from external sources
    • 6.1.1 Equity finance
  • 6.2 Debt
  • 6.3 Long-term debt
    • 6.3.1 Debentures and unsecured notes (bonds)
    • 6.3.2 Mortgage loans
  • 6.4 Hybrids of debt and equity
  • 6.5 Leasing
    • 6.5.1 Operating Lease
    • 6.5.2 Financial Lease
    • 6.5.3 Distinguishing between an operating lease and a financial lease
    • 6.5.4 Sale and Leaseback
    • 6.5.5 The issue of gearing
  • 6.6 Short-term debt
    • 6.6.1 Bank Overdrafts
    • 6.6.2 Fully drawn advance
  • 6.7 Retained Earnings, internal funds and depreciation

• 7. Managing Working Capital

  • 7.1 Managing current assets and current liabilities
    • 7.1.1 Appropriate level of working capital
  • 7.2 Managing inventories
    • 7.2.1 Reasons for holding inventories
    • 7.2.2 The economic order quantity (EOQ)
    • 7.2.3 Re-order point (ROP)
    • 7.3.4 Safety stock (SS)
    • 7.2.5 Quantity discounts
  • 7.3 Managing trade debtors (accounts receivable)
    • 7.3.1 Credit policies
    • 7.3.2 Collection period
    • 7.3.3 Managing cash and near-cash assets
    • 7.3.4 Managing trade creditors (accounts payable)

• 8. Job Costing

  • 8.1 Accounting information about product, service and project costs
    • 8.1.1 Full costing
    • 8.1.2 Single product/service line
    • 8.1.3 Multi product/service
    • 8.1.4 Direct and indirect costs
  • 8.2 How costs behave
    • 8.2.1 Allocating Overheads
  • 8.4 Cost drivers
    • 8.4.1 ABC and the service industry
  • 8.5 Conclusion

2.1.4 Contribution margin

The contribution margin on the products we supply, or the services we provide, is the sell price less the variable cost, using the formula beneath:

Contribution margin = sell price - variable costs.

In the Creek Clothing example:

• Sell price = $6 per unit
• Variable costs = $1 per unit
• Contribution margin = $6 - $1 = $5

The contribution margin helps us to work out how much each unit sold contributes to profit, without taking into account the fixed costs. In order to work out how many pairs of socks need to be sold to break even you may use the formula beneath:

Break even units = Fixed Costs

Contribution Margin per unit

In the Creek Clothing example:

Break even = $1000 = 200

$5

In this case we would need to sell 200 pairs of socks to break even. This is the same figure that we obtained with the previous table.

You might also like to calculate how much revenue you need to earn to break even. This is obtained by multiplying the number of units that need to be sold by the sell price of those units, or by using the following formula:

Break even revenue = break even units x sell price per unit

In the Creek Clothing example:

200 Pairs X $6 Sell Price = $1200

This means that $1200 in sales is required before the business starts to earn profit.

Activity 2

1. Explain the difference between contribution margin and Gross Profit
   
   The Creek Clothing Company accountant has given us the company results for the year and has asked you to do some work.
   
   Company Revenue $ 360,000
   Fixed Cost $ 195,000
   Variable Cost $ 180,000
   Total number of units produced = 90,000
   
2. What is the contribution margin for each unit produced ?
3. What is the Creek Clothing Company's break-even point in units?
4. What is the Creek Clothing Company's break- even point in sales revenue $'s?
5. Using this information to work on the graph over the page, complete the following:
   
   The Creek Clothing Company would like to upgrade their factory and production line to improve efficiency and reduce direct labour costs. From the initial research done by the engineers at Creek Clothing Company the upgrades will increase the fixed costs by $9000, however variable costs will be reduced by $1 per unit and sales revenue will remain at $360,000 (for 90,000 units).
   
6. Find out what the new break-even point is in sales revenue $'s.

Number of units produced	65000	66000	67000	68000	69000
Revenue
Variable costs
Fixed costs
Total costs
Gross profit/(loss)

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