Finance- understanding cost, revenue and profit for a business Essay Example

Finance Finance- understanding cost, revenue and profit for a business Essay Finance- understanding cost, revenue and profit for a business Essay In accounting, costs are the monetary value of expenditures for supplies, services, labour, products, equipment and other items purchased for use by a business or other accounting entity. Here are some of the costs a business needs to know: * Fixed * Start-up cost : * Variable * Total * Marginal * Semi-fixed costs * Direct costs * Indirect costs * Average * Operating costs Fixed costs These costs do not change however many units of a product are made. Factory rent, insurance premiums and administration salaries stay the same, whether the factory is working at full capacity or producing nothing. The owner of the business may have taken out a loan to buy equipment or refurbish a building. The loan will have to be repaid whether or not the business has customers. Variable costs Variable costs change as output changes. For example, the amount of raw materials needed varies as the levels of output go up or down. Piece-work wages also fluctuate, depending on the employees efficiency and the demand for the companys products. Start- up costs These are incurred before a business begins to operate, such as the purchase of land, building and equipments. Total costs The fixed costs and the variable costs are added together to establish the total costs. The fixed costs remain constant, but the variable costs increase in direct proportion with output. Marginal costs Using marginal cost is a way of measuring how much more it will cost a company to make one more individual item. Semi-fixed costs Semi-fixed costs are costs which only change when there is a large change in output. For example, costs associated with buying a new machine to cope with increased production. Also telephones and electricity for instance have a fixed and variable element: a standard line rental and then a charge for each call/unit of electricity after that. Direct costs Direct costs are costs which can be identified directly with the production of a good or service; e.g. raw materials. Indirect costs Indirect costs are costs which cannot be matched against each product because they need to be paid whether or not the production of good or services takes place; e.g. rent on the premises. Classification of costs help allocate costs to right parts of the profit and loss account and also helps analysis of the break even point of the business. Average costs The example of the CD shows the benefits of economies of scale, where mass production results in a lower unit cost. The reason is that the fixed costs do not change and are spread across a greater level of output. Finding out the average cost of production helps a firm to monitor its progress, and makes it easier to set prices. It is calculated by dividing total cost by total output. Using the example of the compact disc firm above: Total costs / Total output = Average cost of production à ¯Ã‚ ¿Ã‚ ½1,000 / 100 CDs = à ¯Ã‚ ¿Ã‚ ½10 per CD This might seem expensive, but if the firm produces another hundred units at a marginal cost of à ¯Ã‚ ¿Ã‚ ½1.00 per CD, its average cost will fall radically: Total costs / Total output = Average cost of production à ¯Ã‚ ¿Ã‚ ½1,100 / 200 CDs = à ¯Ã‚ ¿Ã‚ ½5.50 per CD The firm can use this information to decide whether it is worth accepting a new order for goods. Operating costs Variables costs and fixed costs added together are known as operating or running costs since they are both incurred when a business is running. Revenue In business, revenue or revenues is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Sales these are the main source of revenue for most organisations because customers pay for the goods or services they buy. Leasing a part of a building to another business can also provide a source of income. Some businesses specialise in leasing cars or equipment to other organisations. Interest this earned when a business has no money in an interest bearing accounts at the bank. Calculating total revenue To do this we need two items of information: * The selling price * The number sold We then need use the following formula: Profit Profit generally is the making of gain in business activity for the benefit of the owners of the business. Profit is the difference between the income of the business and all its costs/expenses. It is normally measured over a period of time. Profit is important in three ways: 1. It rewards the business people who have taken risks to run it 2. It provides the funds to develop the business further 3. It is a source of cash, which allows the business to meet its debts Gross profit This is the difference between sales income and the direct costs of making those products. Gross profit is used as a performance indicator to help the business make decisions over its pricing policies and use of materials. In the example, the business had sales of à ¯Ã‚ ¿Ã‚ ½18,000 over the year. Its cost of sales was à ¯Ã‚ ¿Ã‚ ½4,850 and its gross profit, therefore, was à ¯Ã‚ ¿Ã‚ ½13,150. Trading Account for Filling Snacks for year ended 31 December, 2000 à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ Sales 18,000 less Cost of Sales Opening Stock 750 Purchases 5000 Closing Stock (900) (4,850) Gross Profit 13,150 Net profit Net profit represents gross profit less all expenses associated with the normal running of the business. Net profit shows how well the business performs under its normal trading circumstances. It is used to calculate the primary efficiency ratio. Net profit is the final profit of the business. It is the amount of profit made by the owners of the business at the end of the period. In this Example when we take expenses into account, we can see that what was a gross profit of à ¯Ã‚ ¿Ã‚ ½13,150 is now a net loss of à ¯Ã‚ ¿Ã‚ ½1,650. Trading and Profit Loss Account for Filling Snacks for year ended 31 December, 2000 à ¯Ã‚ ¿Ã‚ ½ à ¯Ã‚ ¿Ã‚ ½ Sales 18,000 less Cost of Sales Opening Stock 750 Purchases 5,000 Closing Stock (900) (4,850) Gross Profit 13,150 less Expenses Rent 10,000 Interest Payments 1,800 Light Heat 1,500 Advertising 500 Other 1,000 (14,800) Net Profit (1,650) Retained profit Retained profit is the profit left over after the shareholders have been paid their dividends. Retained profit is normally reinvested in the business. Profit is important to a business because it is a reward to the owners of the business. They have taken risks with their money and time. If there was no profit, then there would be little point in starting up or putting more money into the business, they might as well put the money into a bank or building society Profit maximization Profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue total cost method relies on the fact that profit equals revenue minus cost. There are two basic ways of improving profits: * Increasing sales income * Reducing running costs Increasing sales income There are different ways of trying to achieve this. They all have risks as shown in the charts. Methods Risks Increase prise Sales could fail Reduce prices to increase sales Not enough extra sales would be made to compensate Reducing operating costs We already know that cost fall in to two variables and fixed. Many business have operating cost like bills, labours, raw materials etc. An example of reducing operating profit is given below, a valeting business have a list which begins: Staff wages à ¯Ã‚ ¿Ã‚ ½200,000 Property rental à ¯Ã‚ ¿Ã‚ ½50,000 And end with Ball pens à ¯Ã‚ ¿Ã‚ ½20.00 Paper clips à ¯Ã‚ ¿Ã‚ ½4.50 Method of reducing costs falls into main categories: * Minimising usage * Finding the best purchase deal Item Use less Reduce purchase price Labour Reduce staff levels by increasing number of automated or computerised operations Increase productivity sub-contract work to cheapest bidder Raw materials Use fewer materials in product Look for a cheaper supplier Gas, water and electricity Replace older item with efficient ones, e.g. Energy- saving bulbs, light which turn off automatically. Switch utility company if this would reduced costs Consumable items, e.g. stationary Send documents by e-mail rather than by post. Shop around for cheaper suppliers and investigate online source The importance of profit After tax is paid the business can spend the remaining money in several ways. If the business is a limited company with shareholders, some of the profits will be paid as dividends. These are the rewards paid to shareholders for investing their money- similar to the interest you if you save money in the bank.

The History of Chemical Explosives

The History of Chemical Explosives An explosion can be defined as the rapid expansion of a material or device that exerts a sudden pressure on its surroundings. It can be caused by one of three things: a chemical reaction that occurs during conversion of elemental compounds, a mechanical or physical impact, or a nuclear reaction on the atomic/subatomic level. Gasoline exploding when ignited is a chemical explosion brought about by the sudden conversion of a hydrocarbon to carbon dioxide and water. The explosion that occurs when meteor strikes the earth is a mechanical explosion. And a nuclear warhead explosion is the result of the nucleus of a radioactive substance, like plutonium, suddenly splitting apart in an uncontrolled fashion. But it is chemical explosives that are the most common form of explosives in human history, used both for creative/commercial and destructive effect. The strength of a given explosive is measured that the rate of expansion it exhibits during detonation. Lets look briefly at some common chemical explosives. Black Powder It is unknown who invented the first explosive black powder. Black powder, also known as gunpowder, is a mixture of saltpeter (potassium nitrate), sulfur, and charcoal (carbon). It originated in China around in the ninth century and was in wide use throughout Asia and Europe by the end of the 13th century. It was commonly used in fireworks and signals, as well as in mining and building operations. Black powder is the oldest form of ballistic propellant and it was used with early muzzle-type firearms and other artillery uses. In 1831, William Bickford an English leather merchant invented the first safety fuse. Using a safety fuse made black powder explosives more practical and safer. But because black powder is messy explosive, by the end of the 18th century it was replaced by high explosives and by cleaner smokeless powder explosives, such as what is currently used in firearm ammunition. Black powder is categorized as a low explosive because it expands and subsonic speeds when it detonates. High explosives, by contract, expand as supersonic speeds, thereby creating much more force. Nitroglycerin Nitroglycerin is a chemical explosive that was discovered by Italian chemist Ascanio Sobrero in 1846. It was the first explosive developed that was more powerful than black powder, Nitroglycerin is a mix of nitric acid, sulphuric acid, and glycerol, and it is highly volatile. Its inventor, Sobrero, warned against its potential dangers, but Alfred Nobel adopted it as a commercial explosive in 1864. Several serious accidents, however, caused pure liquid nitroglycerin to be widely banned, leading to Nobels eventual invention of dynamite. Nitrocellulose In 1846, Chemist Christian Schonbein discovered nitrocellulose, also called guncotton, when he accidentally spilled a mixture of potent nitric acid on a cotton apron and the apron exploded as it dried. Experiments by Schonbein and others quickly established a means of manufacturing guncotton safely, and because it had a clean, explosive power almost six times greater than black powder, it quickly was adopted for use as means for propelling projectiles in weapons.   TNT In 1863, TNT or Trinitrotoluene was invented by German chemist Joseph Wilbrand. Originally formulated as a yellow dye, its explosive properties were not immediately evident. Its stablity was such that it could be safely poured into shell casings, and in the early 20th century it came into standard usage for German and British military munitions. Considered a high explosive, TNT is still in common use by the U.S. military and by construction companies around the world.   Blasting Cap In 1865, Alfred Nobel invented the blasting cap. The blasting cap provided a safer and dependable means of detonating nitroglycerin. Dynamite In 1867, Alfred Nobel patented dynamite, a high explosive that consisted of a mixture of three parts nitroglycerine, one part diatomaceous earth (ground silica rock) as an absorbent, and a small amount of sodium carbonate antacid as a stabilizer. The resultant mixture was considerably safer than pure nitroglycerine, as well as being much more powerful than black powder. Other materials are now used as the absorbent and stabilizing agents, but dynamite remains the premier explosive for use in commercial mining and construction demolition. Smokeless Powders In 1888, Alfred Nobel invented a dense smokeless powder explosive called ballistite. In 1889, Sir James Dewar and Sir Frederick Abel invented another smokeless gunpowder called cordite. Cordite was made of  nitroglycerin, guncotton, and a petroleum substance gelatinized by addition of acetone. Later variations of these smokeless powders form the propellant for most modern firearms and artillery. Modern Explosives Since 1955, a variety of additional high explosives has been developed. Created mostly for military use, they also have commercial applications, such as in deep drilling operations.  Explosives such as nitrate-fuel oil mixtures or ANFO and ammonium nitrate-base water gels now account for seventy percent of the explosives market. These explosives come in various types including: HMXRDXHNIWONC