17.6.2 International location consideration Exchange rate risks Trade barriers Ethical considerations Political, legal and language consideration 17.7 Production methods - making the choice Size of the market Job production if the market is too small Batch production if the market demands a large number of units but at different times of the year, and Flow productions when the market for similar or identical products is very large and constant throughout the year The amount of capital available Availability of other resources If a firm wants cost advantages of high volumes combined with the ability to make slightly different products for different markets- mass customisation Chapter 18 Costs, break-even and costing methods Chapter objectives Explain the different classifications given to production costs Understand the uses to which cost data can be put Analyse which costs of production are likely to vary with output and which will not Use costs of production in break-even analysis Apply break-even analysis in simple business decision-making situations Evaluate the usefulness of break-even analysis
BUSINESS STUDIES MS.VIMAL A N.K Understand the different costing methods Apply different costing methods to operations management decisions Evaluate the relative usefulness of these costing methods for decision making 18.1 uses of cost data Business costs are a key factor in the profit equation. No record of costs means effective and profitable decisions cannot be made Important to marketing department for pricing decisions Keeping cost records allow comparisons to be made Past cost data can help to set budgets for the future 18.2 Costs of production Direct costs Can be clearly identified with each unit of production and can vary with the level of output, e.g. cost of raw materials, labour cost Indirect costs (overheads) Cannot be identified with a unit of production because they are associated with performing a range of tasks or producing a range of products, e.g. promotional expenditure for a supermarket, rental of a garage, cleaning services Fixed costs Remain fixed regardless of the level of output, e.g. rent of premises Variable costs Vary as output varies, e.g. direct cost of materials Semi-variable costs Include both a fixed and a variable component, e.g. salesperson's fixed basic wage plus a commission that varies from sales Marginal costs
BUSINESS STUDIES MS.VIMAL A N.K Additional costs of producing one more unit of output, and will be the extra variable costs needed to make this extra unit. Marginal costs of making one more wooden table are the additional materials and labour costs involved 18.3 Break-even analysis The break-even of production is that level of output at which total costs equal total revenue. Undertaken in 2 ways:- The graphical method The equation method Breakeven point= Fixed costs Contribution 18.3.1 Usefulness of break-even analysis
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