Business

2iec

Structured Writing - Simple Model

Structured Writing - Intermediate Model

Structured Writing - Advanced Model

Learner Guide

Check the Learner Guide

Part 1: Business and its environment

Enterprise
Business structure
Size of business
Business objectives
Stakeholders in a business

Chapter 1: Enterprise

business objectives
transformation process
factors of production
primary sector
adding value
brand
market forces
opportunity cost
entrepreneur
enterprise
intrapreneur

Chapter 2: Business structure

nationalisation
privatisation
merit goods
unlimited liability
company
shareholders
limited liability
franchise
co-operatives
joint ventures
social enterprises

Chapter 3: Size of business

niche
type of integration (horizontal, vertical, conglomerate diversification)
internal and external growth

Chapter 4: Business objectives

objective
labour productivity
corporate objective
market share
cash flow
ethics
social responsibility

Chapter 4: Business objectives

mission statement
aim
strategy
tactics
target
budgets
ethical behaviour

Chapter 5: Stakeholders in a business

stakeholders
authority
internal stakeholders
external stakeholders
dividends

Chapter 6: External influences on business activity

Political and legal influences
Social and demographic influences
Technological influences on business activities
Influence of competitors and suppliers
International influences
Environmental influences on business activity

1. Political and legal influences

privatisation or nationalisation
legal constraints

conditions of work, minimum wage, ...
competition
...

health and safety laws
...

activity 6.1

activity 6.2

activity 6.3

activity 6.4

2. Social and demographic influences

corporate social responsibility (CSR)
demographic changes
...

3. Technological influences on business activities

technological change
impact on decision-making of businesses
process of introducing technology into a business

4. Influence of competitors and suppliers (short)

market share
market power
decision on pricing
...

5. International influences

international trade (importance, agreements, ...)
WTO, Free-trade blocs
technology in international trade

AI
blockchain
digital payments

Multinational businesses
...

6. Environmental influences on business activity

CSR, environment and business decisions
environmental audits
sustainability
...

analyse ...

Chapter 7: External economic influences on business activity

Government support for business activity
How governments deal with market failure
Macroeconomic objectives of governments
How economic objectives and performance impact business activity
Government policies to achieve macroeconomic objectives

Government support for business activity

Government assistance for entrepreneurs

loan guarantee schemes
provide information, advice, training, ...
financing of workshops, ...
reduce paperwork and legal formalities
reduce corporation tax on new and small businesses

Government assistance for all businesses

Government support for business activity

Government assistance for entrepreneurs
Government assistance for all businesses

subsidies to keep prices down
subsidies to protect employment
grants to relocate to areas with high unemployment
financial support for housing

Government support for business activity

advantages and disadvantages of subidies

advantages

avoids business failure
keeps suppliers in business
avoids rising imports

disadvantages

taxes will rise
disincentive to be more efficient
consumers drawn to subsidised products

How governments deal with market failure

Examples of market failure

external costs
labour training
monopoly producers

Correcting or controlling market failure

Macroeconomic objectives of governments

economic growth
inflation
unemployment
balance of bayment
exchange rate

How economic objectives and performance impact business activity

Economic growth

benefits
causes
business cycle
role of recessions

inflation and deflation
Unemployment

How economic objectives and performance impact business activity

Economic growth
inflation and deflation

causes of inflation
impact of low inflation
impact of high inflation

Unemployment

How economic objectives and performance impact business activity

Economic growth
inflation and deflation
Unemployment

causes of unemployment
cyclical unemployment
structural unemployment
frictional unemployment
costs of unemployment

Government policies to achieve macroeconomic objectives

Monetary policy
Fiscal policy
Supply-side policies
Exchange rate policy

Chapter 8: Business strategy

Business strategy : meaning and purpose
Strategic management: meaning and purpose
Approaches to developing business strategy

Business strategy : meaning and purpose

Establishing business strategy

Resources available
Strengths of the business
Competitive environment
Objectives

Strategic management: meaning and purpose

Strategic choice
Strategic implementation
Strategy and tactics
The need for strategic management

Approaches to developing business strategy

Blue ocean strategy
Scenario planning
SWOT analysis
PEST analysis
Porter's five forces analysis
Core competencies
The Ansoff matrix
Force-field analysis
Decision trees

essay questions

Evaluate how a large supermarket company might use SWOT and PEST analysis in order to make a successful expansion overseas.
Evaluate why a hotel business might use blue ocean strategy, rather than concentrating on red ocean strategy.
Evaluate how a fast-food company might use Porter's Five Force analysis to identify changes to the market environment in which they operate.

essay questions

Evaluate whether a retail clothing business without identifiable core competencies might fail in the market in your country.
Evaluate how a wheat-farming business might use the Ansoff Matrix and decision-tree analysis to decide whether to move into chicken farming or use the land to build and rent holiday accommodation to tourists.

Part 2: Human resource management

Human resource management
Motivation
Management

Chapter 10: Human resource management

human resource management (HRM)
delayering
teamworking
workforce plan (or human resource plan)
labour turnover
recruitment and selection
job descriptions
person specifications (or job specifications)
employment contract

Chapter 10: Human resource management

business culture
dismissal
redundancies
employee welfare
employee morale
work-life balance
diversity
equality

Chapter 10: Human resource management

training
development
delegation
intrapreneurship
multi-skilling
trade union
collective bargaining

Chapter 10: Human resource management

\[\begin{aligned} \text{turnover} & = \frac{ \text{number of staff leaving during the year} }{ \text{average number of staff} } \times 100 \end{aligned} \]

Chapter 11: Motivation

motivation
absenteeism
human needs
schools of thought
piece-rate
division of labour
hierarchy of needs
hygiene factors ( or maintenance factors)
motivators

Chapter 11: Motivation

performance-related pay (PRP)
variable pay
fringe benefits (or perks)
job redesign
job enrichment (or vertical loading)
job enlargement (or horizontal loading)
job rotation
empowerment
job design
employee participation

Chapter 12: Management

leadership
management
autocratic management (or authoritarian management)
paternalistic management
democratic management (or participative management)
laissez-faire management

Part 3: Marketing

The nature of marketing
Market research
The marketing mix - product and price
The marketing mix - promotion and place

Chapter 17: The nature of marketing

marketing
marketing objective
corporate objective
marketing strategy
business-to-consumer marketing (B2C)
business-to-business marketing (B2B)
market size

Chapter 17: The nature of marketing

market growth
unique selling point (USP)
niche marketing
market segment
mass marketing
customer-relationship marketing (CRM)
customer retention

Chapter 17: The nature of marketing

\[\begin{aligned} \text{market share} & = \frac{ \text{sales of a business (or product)} }{ \text{total market sales} } \times 100 \\ \\ \text{market growth} & = \frac{ \text{(market sales)}_{ \text{this year} } - \text{(market sales)}_{ \text{last year} } }{ \text{market sales}_{ \text{last year} } } \times 100 \end{aligned} \]

Chapter 18: Market research

market research
primary market research
focus group
secondary market research
sample
validity of market research
reliability of market research

Chapter 18: Market research

\[\begin{aligned} \text{market growth} & = \frac{ \text{change in market size} }{ \text{original market size} } \times 100 \\ \\ \text{market share of business} & = \frac{ \text{sales by the business} }{ \text{total market sales} } \times 100 \end{aligned} \]

Chapter 19: The marketing mix - product and price

marketing mix
products
tangible attributes
intangible aspects
product differentiation
product portfolio analysis
product life cycle
extension strategy
product portfolio analysis (PPA)

Chapter 19: The marketing mix - product and price

Boston Matrix
competitive pricing
penetration pricing
price skimming
price discrimination
dynamic pricing
cost-based pricing
psychological pricing
promotional mix

Chapter 20: The marketing mix - promotion and place

digital promotion
click-through rate (CTR)
marketing expenditure budget
distribution channel
distribution outlet

The Economics of Aldi

strategies that Aldi uses to maintain low prices and attract customers

The Economics of Aldi

discuss the following items

Store Layout and Size
Limited Product Range and Simplified Operations
Cost-Cutting Measures
Marketing and Customer Perception
Known Value Items
Private Label Products
Recession and Growth
Expansion and Competition
Target Audience

Part 4: Operations management

The nature of operations
Inventory management
Capacity utilisation and outsourcing

Chapter 23: The nature of operations

output
inventory
operations mangement
productivity
sustainable
capital-intensive
labour-intensive

marketing function
$\longrightarrow$ identify opportunities within a market
operations function
$\longrightarrow$ deliver as effectively as possible

effective operations

means the business ...
... is meeting its operational targets

efficient operations

produce and deliver products ...
... in a cost-efficient manner

consequences of poor operations

mistakes are being made during production
items will have to be replaced
products have to be recalled
damages have to be paid

output

the total amount produced ...
... in a given time period

different forms of the transformation process

involves changing the ...

... characteristics of

materials
information
customers

... location of materials and information
... ownership of materials

inventory

refers to the stocks held in a business ...
... such as materials ...
... and semi-finished goods

operations mangement

overseeing ...
... the planning, coordination and control
... of the transformation process, ...
... turning resources (inputs) into outputs.

factors of production

land
labour
capital
enterprise

labour productivity

\[\begin{aligned} \text{labour productivity} & = \frac{ \text{total output} }{ \text{number of employees} } \times 100 \end{aligned} \]

productivity

measures the output per hour, ...
... per person ...
... or per machine.

sustainable activities

activities that meet the needs of ...
... the business or of society ...
... without compromising on the ability ...
... to meet future needs.

capital-intensive production

production where there is ...
... a high proportion of capital ...
... used relative to ...
... other factors of production.

labour-intensive production

production where there is ...
... a relatively high proportion ...
... of labour used relative to ...
... other factors of production.

production process

factors of production

land
labour
capital
enterprise

stages of production :
input $\longrightarrow$ production process $\longrightarrow$ output
operations can increase the added value

operations can increase added value by managing

efficiency of production
quality of goods & services
flexibility & innovation of processes
design of the product
efficiency of operations
effective branding of the product
$\longrightarrow$ production costs $\downarrow$
$\longrightarrow$ quality of goods $\uparrow$
$\longrightarrow$ flexibility of production $\uparrow$

productivity

high productivity $\longrightarrow$ competitiveness $\uparrow$
measuring productivity

\[\begin{aligned} \text{labour productivity} & = \frac{ \text{total output} }{ \text{number of employees} } \times 100 \end{aligned} \]

productivity can be increased by

improving training of employees
$\longrightarrow$ skill level $\uparrow$
improving worker motivation
purchasing new technologies
guaranteeing more efficient management

high productivity : no guarantee for success!

how popular is the product?
highly productive workers $\longrightarrow$ wages $\uparrow$
resistence by workers to measures
culture of management
efficiency $\neq$ effectiveness

sustainable operations

energy use $\downarrow$ & carbon emissions $\downarrow$
use of non-biodegradable material $\downarrow$
use of recycled material $\uparrow$
products that is recyclable

labour intensive operations

advantages

interesting job
low reliance on machines
meet customer requirement

disadvantages

low output
skilled labour required
quality not always uniform

labour intensive operations

capital intensive operations

advantages

economies of scale
consistent quality
low unit cost
mass production

disadvantages

high fixed costs
high maintenance costs
keep up with technology changes

capital intensive operations

types of operations methods

job production : one-off production
batch production : move from one stage of process to another
flow production : large scale production
mass customisation : large scale production with flexibility

job production

batch production

flow production

factors influencing the choice of production method

size of market
availability of capital
availability of other resources

unskilled workers $\rightarrow$ mass production
flat area land $\rightarrow$ mass production

customer requirements

Chapter 24: Inventory management

supply chain
supply chain management
lean production

operations efficiency & inventory

holding cost $\leftrightarrow$ cost of running out of supplies
reasons for holding inventory

raw materials & components (as input)
work in progress
finished goods (until being sold)

operations efficiency & inventory

problems rising from insufficient inventory

unforseen changes in demand
obsolete inventories
inventory wastage
opportunity costs
late deliveries

cost & benefit of holding inventory

cost of holding inventory

opportunity cost
storage cost
wastage & obsolescence

benefit of holding inventory

risk of lost sales $\downarrow$
allows continuous production
need for special orders from suppliers $\downarrow$

total inventory-holding cost

economic order quantity (EOQ)

inventory control chart

monitor a firm's inventory position
helps to determine the

appropriate order time and
order quantity

key features of inventory control chart

buffer inventories
maximum inventory level
re-order quantity
lead time
re-order level

inventory control chart

supply chain management

goal of supply chain management

minimize costs and
improve customer service
reduce time to convert raw material into completed product

benefits of supply chain management

improves customer service
reduces operating costs
umproves profitability

just-in-time model (applied to Toyota)

just-in-time

advantages

capital invested in inventory $\downarrow$
storage cost $\downarrow$
risk of obsolescence of inventory $\downarrow$
multi-skilled and adaptable staff

disadvantages

delay in supplies $\rightarrow$ production delays
delivery costs
many small orders $\rightarrow$ administration cost
reputation may depend on outside firms

just-in-time model and COVID

source: Supply chains: companies shift from 'just in time' to 'just in case' (FT)

conditions for successful JIT

good supplier relationships
skilled and flexible production staff
flexible machinery
accurate demand forecasts
modern IT equipment
excellent employer-employee relationships

Chapter 25: Capacity utilisation and outsourcing

capacity
factors of production
capacity utilisation
capacity under-utilisation
rationalisation
subcontracting
outsourcing

Chapter 25: Capacity utilisation and outsourcing

\[\begin{aligned} \text{per cent capacity} & = \frac{ \text{existing output}_{ \text{over a given time period} } }{ \text{maximum possible output}_{ \text{over a given time period} } } \times 100 \end{aligned} \]

Part 5: Finance and accounting

Business finance
Forecasting and managing cash flows
Costs
Budgets

Chapter 29: Business finance

asset
capital
non-current assets
short-term sources of finance
long-term sources of finance
insolvency
liabilities
bankruptcy
liquidation

Chapter 29: Business finance

administration
working capital
current assets
trade payables
trade receivables
revenue expenditure
capital expenditure
statement of financial position
income statement

asset

an item owned by a business ...
... that can generate an income for the enterprise
Examples:

supply of raw material
machinery

capital

money invested into a business ...
... either by its owners or by other organisations
Examples:

money
machinery
building

non-current assets

assets ...
... that a business expects to hold for one year or more
Examples:

property
vehicles

sources of finance

short-term sources of finance : needed for limited period of time (< 1 year)
long-term sources of finance : needed over a long period of time (> 1 year)

insolvency

debts (of the business) > assets (available)
business is unable to pay its debts

liabilities

money owned by a business ...
... to individuals, suppliers, banks, ...

working capital

money used to pay for day-to-day expenses ...
... so the business can keep operating

current assets

are items owned by a business ...
... that can be readily turned into cash
Examples :

cash in bank
trade and other receivables due to settle their accounts soon
inventories - raw materials and components

current liabilities

debts payable in short term
debts repayable to the bank (i.e. overdraft)
trade and other payables who expect to be paid in the near future
tax due to authorities

working capital

\[\begin{aligned} \text{working capital} & = \text{current assets} - \text{current liabilities} \end{aligned} \]

bankruptcy

when an individual, a sole trader or a partnership ...
... is judged unable to pay its debts ...
... by a court of law

liquidation

is the dissolution of a company ...
... by selling its assets to settle its liabilities

administration

is a process available to a company ...
... to protect itself ...
... while it attempts to pay its debts ...
... and escape insolvency

trade payables

is the amount of money ...
... owed by a business to its suppliers ...
... for goods and services ...
... that have been received ...
... but which have not been paid for

trade receivables

is the amount of money ...
... owed by a business' customer ...
... for products ...
... that have been supplied ...
... but for which payment has not yet been made

revenue expenditure

refers to the purchase of items ...
... that will be used up within a short space of time
Examples :

fuel
raw materials

capital expenditure

is the spending by a business ...
... on non-current assets
Examples :

premises
production equipment
vehicles

statement of financial position (balance-sheet)

is a financial statement ...
... that records the assets (possessions) and liabilities (debts) of a business ...
... on a particular day ...
... at the end of an accounting period
Example : Luxair (p.56-59)

income statement

is a financial statement ...
... showing a business' sales revenue ...
... over a trading period ...
... and all the relevant costs incurred to generate that revenue
Example : Luxair (p.60)

income statement

is a financial statement ...
... showing a business' sales revenue ...
... over a trading period ...
... and all the relevant costs incurred to generate that revenue
Example : Luxair (p.60)

Classroom activity

Read Mobile Phone extract (p.488)
Analyse the likely increase in working capital from this expansion.
Discuss how inventories, trade payables and trade receivables could be managed to reduce the need to increse working capital.
see Learner Guide for the command words

Homework

Read chapter 29 for next week.
Revise using the Exam-Style Questions

need for business finance

why?
start-up capital, working capital, R&D, buy other companies, survival of company
short-term vs. long-term need
buy inventory before busiest months (ST), buy equipment and buildings (LT)
cash $\neq$ profit
cash is needed in the short-run, profit can wait for the long-run

need for business finance

administration business fails due to a lack of finance
bankruptcy accountants are appointed to keep the business operational and find a buyer for it - if they fail we have bankruptcy
liquidation a legal process will begin that will liquidate the assets of the business

working capital

Chapter 30: Forecasting and managing cash flows

cash flow
insolvent
cash flow forecast
cash inflow
cash outflow
net cash flow

Chapter 30: Forecasting and managing cash flows

opening cash balance
closing cash balance
credit control
bad debt
overtrading
decision-making

cash flow

the sum of ...
... cash payments ...
... to a business ...
... less ...
... the sum of ...
... cash payments ...
... from the business

$ \text{net cash} = \text{total cash inflows} - \text{total cash outflows} $

insolvent

when a business ...
... cannot meet ...
... its short-term debts

cash flow forecast

an estimate ...
... of the future ...
... cash inflows and outflows ...
... of a business

cash inflow: cash payments into a business

cash outflow: cash payments out of a business

cash inflows examples

owner's own capital
bank loan
customer's cash purchases
trade receivables

cash outflows examples

lease payments
rent payment
electricity, water, phone, ... bills
wage payments
cost of materials
payments to suppliers

cash flow forecast

net cash flow

estimated difference between ...
... cash inflows and cash outflows ...
... for the period (i.e. month)

$ \text{net cash flow} = \text{total cash inflows} \\ \hspace{8cm} - \text{total cash outflows} $
in a given time period (for example, month)

opening cash balance

cash held by ...
... the business ...
... at the start of the month

closing cash balance

cash held by ...
... the business ...
... at the end of the month

closing cash and opening cash balance

$\text{(closing cash)}_{\text{february}} = \text{(opening cash)}_{ \text{march} }$

cash flow forecast

$\text{closing cash balance}$
$=$
$ \text{opening cash balance} + ( \text{cash inflows} - \text{cash outflows} ) $

application: cash flow forecast

Draw up the revised cash flow forecast for December, assuming

cash sales are forecast to be 300 USD higher
payments to bank interests are forecast to be 150 USD higher
wages are forecast to be 2000 USD higher

Recalculate the closing cash balance for December.

credit control

monitoring of debts ...
... to ensure that ...
... credit periods ...
... are not exceeded

bad debt

unpaid customers' bills ...
... that are now very unlikely ...
... to ever be paid

overtrading

expanding a business rapidly ...
... without obtaining ...
... all of the necessary finance ...
... resulting in a cash flow shortage

decision-making

Chapter 31: Costs

break-even point
cost centre
direct costs
indirect costs
fixed costs
variable costs
total costs
profit centre

Chapter 31: Costs

average cost
full costing
contribution costing
marginal cost
break-even analysis
margin of safety
contribution per unit

Chapter 31: Costs

costs
revenue
direct costs
indirect costs
full costing
contribution
break-even
profits

Chapter 31: Costs

contribution costing
average costs
marginal costs
cost-plus pricing
contribution pricing
special-order decisions
margin of safety

costs

expenses ...
... that a business has to pay ...
... to engage in its trading activities

revenue

income a business receives ...
... from selling ...
... its goods and services

$ \text{revenue} = \text{quantity sold} \times \text{average selling price} $

profit (or loss)

$ \text{profit (or loss)} = \text{total revenue} - \text{total cost} $

Profit if $\text{TR} > \text{TC}$
Loss if $\text{TR} < \text{TC}$
Break-even if $\text{TR} = \text{TC}$

break-even point

the level of output at which ...
... total costs equal total revenue ...
... when neither a profit ...
... nor a loss is made

cost centre

the section of a business ...
... such as a department or a product ...
... that incurs the costs

direct costs

these costs can be clearly identified ...
... with each unit of production ...
... and can be allocated ...
... to a cost centre
Examples: automobile industry

direct materials: sheet steel, engine parts
direct labour: wages paid to employees on production line

indirect costs

costs that cannot be identified ...
... with a unit of production ...
... or allocated accurately ...
... to a cost centre
Examples: automobile industry

indirect labour costs: management salaries, wages paid to security staff
other indirect costs: administration, distribution

contribution

difference between ... ...
... sales revenue and ...
... variable costs of production

contribution

fixed costs

costs that do not vary ...
... with output ...
... in the short run

Decomposing total costs as fixed costs plus variable costs.

variable costs

costs that vary ...
... with output

Decomposing total costs as fixed costs plus variable costs.

total costs

variable cost ...
... plus fixed cost

Decomposing total costs as fixed costs plus variable costs.

profit centre

a section of a business ...
... to which both costs and revenues ...
... can be allocated ...
... so profit can be calculated

average cost

total cost ...
... divided by the ...
... number of units produced

full costing

a method of costing in which all ...
... indirect and direct costs ...
... are allocated to the ...
... products, services or divisions ...
... of a business

contribution costing

costing method ...
... that allocates only direct costs ...
... to cost centres and profit centres ...
... not overhead costs

cost centre

in a manufacturing business

products
departments
factories

in a hotel

restaurant
reception
room letting

in a school

subject departments

profit centre

branches of a chain of shops
departments of a department store
products in a portfolio of a firm

overhead (indirect expenses)

production overheads

rent
depreciation

selling and distribution overheads

warehouse
packing and distribution costs

administration overheads

office rent
clerical salaries

finance overheads

interest on loans

marginal cost

the additional cost of producing ...
... one more unit of output

break-even analysis

uses cost and revenue data ...
... to determine the break-even point ...
... of production

A standard break-even analysis chart

break-even output

$ \text{break-even output} = \frac{ \text{fixed costs} }{ \text{contribution per unit} } $

$ \text{where} $

$ \scriptsize{\text{contribution per unit} = \text{selling price per unit} - \text{variable cost per unit}} $

margin of safety

the amount by which ...
... the current output level ...
... exceeds ...
... the break-even level of output

margin of safety

$\text{margin of safety (%)} = \frac{ \text{current level of sales} - \text{break-even output} }{ \text{current level of sales} } \times 100 $

Interpretation: A business could lose just over x % of its sales before it found itself in a break-even position.

margin of safety

contribution per unit

the price of a product ...
... less ...
... the direct (variable) costs ...
... of producing it

cost-plus pricing

the process of establishing ...
... the price of a product ...
... by calculating its cost of production ...
... and then adding an amount ...
... which is profit

contribution pricing

based on the notion ...
... that any price set that is higher than ...
... the variable cost of producing a product ...
... is making a payment towards fixed costs

class-room activity: data response question

Midtown Imperial Hotel (p.530)
Cosmic Cases (p.531)
Gowri's Pottery (p.531)
Abbey Restaurant (p.532)

Chapter 31: Costs

\[\begin{aligned} \text{profit (or loss)} & = \text{total revenue} - \text{total costs} \\ \\ \text{total cost of production} & = \text{direct costs} + \text{indirect costs} \end{aligned} \]

Chapter 31: Costs

\[\begin{aligned} \text{contribution per unit} & = \text{selling price of one unit of output} \\ & \ \ \ \ \ \ + \text{variable costs of producing that unit} \\ \text{or} \\ \text{contribution} & = \text{revenue} + \text{variable costs} \end{aligned} \]

Chapter 31: Costs

\[\begin{aligned} \text{break-even output} & = \frac{ \text{fixed costs} }{ \text{selling price per unit} - \text{variable cost per unit} } \\ \text{or} \\ \text{break-even output} & = \frac{ \text{fixed costs} }{ \text{contribution per unit} } \end{aligned} \]

Chapter 31: Costs

\[\begin{aligned} \text{margin of safety} & = \frac{ \text{current level of sales} - \text{break-even output} }{ \text{current level of sales} } \times 100 \end{aligned} \]

What does the 'margin of safety' in budgeting refer to?

A. The extra funds allocated for unexpected expenses.
B. The difference between the actual sales and the break-even sales.
C. The percentage by which a company's actual profit exceeds its planned profit.
D. The allowable deviation in a budget before triggering a review.

How is 'contribution per unit' calculated in cost accounting?

A. Total Sales Revenue divided by the Number of Units Sold.
B. Total Fixed Costs divided by the Number of Units Sold.
C. Selling Price per Unit minus Variable Cost per Unit.
D. Total Variable Costs divided by the Number of Units Sold.

What does break-even analysis primarily determine?

A. The total variable costs of production.
B. The point at which total revenue equals total costs, resulting in no profit or loss.
C. The maximum capacity of production for a business.
D. The total fixed costs of a business.

What does 'marginal cost' refer to in economics?

A. The cost of producing one additional unit of a product.
B. The total cost of all units produced divided by the number of units.
C. The fixed costs that a company incurs regardless of production levels.
D. The variable cost per unit of production.

What is the primary focus of contribution costing in management accounting?

A. Calculating the total fixed costs of production.
B. Determining the contribution of each unit sold towards fixed costs and profits.
C. Assessing the profitability of different product lines.
D. Estimating the break-even point of production.

What is a key characteristic of full costing?

A. It only considers direct costs associated with production.
B. It allocates all fixed and variable costs to each unit of product.
C. It focuses exclusively on variable costs in cost calculation.
D. It is primarily used for short-term decision making.

What does 'average cost' represent in economics?

A. The total cost of producing a single unit of product.
B. The cost of producing the next unit of product.
C. The sum of fixed and variable costs divided by the total number of units produced.
D. The average amount of profit earned per unit of product sold.

What is a 'profit centre' in a business organization?

A. A department that focuses exclusively on cost reduction.
B. A unit within the organization that is responsible for generating its own revenue and profits.
C. The finance department that handles all profit-related reporting.
D. A team responsible for investments and financial growth decisions.

What is a 'cost centre' in a business organization?

A. A department primarily responsible for generating revenue.
B. A unit within the organization that is responsible for managing and controlling costs.
C. The financial department that calculates the overall profitability of the company.
D. A team responsible for investment decisions in the organization.

What is the main difference between direct and indirect costs in business?

A. Direct costs are always variable, while indirect costs are fixed.
B. Direct costs can be directly attributed to the production of goods, while indirect costs cannot.
C. Indirect costs are related to specific projects, while direct costs are general to the business.
D. Direct costs are incurred during the sales process, while indirect costs are part of production.

How are fixed costs, variable costs, and total costs related in business?

A. Fixed costs vary with production levels, while variable costs are constant regardless of production volume.
B. Variable costs change with production levels, and total cost is the sum of fixed and variable costs.
C. Total cost is determined by the volume of production, independent of fixed and variable costs.
D. Fixed costs are the only component that determines the total cost in a business.

Chapter 32: Budgets

incremental budgeting
flexible budget
budget holder
zero budgets

Chapter 32: Budgets

budgeting
budget holder
variance analysis
delegated budgets
incremental budgeting
zero budgeting
favourable variance
flexible budgeting
adverse variance

budgeting

planning future activities ...
... by establishing ...
... performance targets ...
... especially financial ones

budget holder

the individual ...
... responsible for ...
... initial setting and achievement ...
... of a budget

variance analysis

calculation of ...
... the differences between ...
... budgets and actual figures ...
... and analysis of the reasons ...
... for such differences

delegated budgets

budgets for which ...
... junior managers ...
... have been given ...
... some authority ...
... for setting and achieving

incremental budgeting

uses last year's budget ...
... as a basis ...
... and an adjustment is made ...
... for the coming year

zero budgeting

sets budgets to zero ...
... each year and ...
... budget holders ...
... have to argue their case ...
... for target levels ...
... and to receive any finance

favourable variance

a change from the budget ...
... that leads to
... higher than planned profit

flexible budgeting

cost budgets ...
... for each expense ...
... are allowed to vary ...
... if sales or output ...
... vary from budgeted levels

adverse variance

a change from ...
... the budget that leads ...
... to lower than planned profit

Collaborative reading

The measurement of performance
Benefits of using budgets
Potential drawbacks of using budgets
Key features of effective budgeting
Setting and using budgets
Variance analysis

The measurement of performance

actual performance vs. pre-set targets
non-financial targets
financial targets

benefits of using budgets

planning
allocating resources
setting targets
coordination
controlling and monitoring a business
measuring and assessing performance

potential drawbacks of using budgets

lack of flexibility
focus on the short term
unnecessary spending
training on budgets
budgets for new projects

key features of effective budgeting

budget: not a forecast but a plan
outcome must be measurable
coordination between departments
participation (delegated budgets)
identify successful/unsuccessful managers of cost or profit centres

setting and using budgets

incremental budgeting
zero budgeting
flexible budgeting

variance analysis

Definition: A variance is the difference between a budget and the actual figures

measuring performance
making realistic budgets in the future
taking better decisions
assessing performances in an objective way
causes of
- adverse variances vs.
- causes of favourable variances

Variance Analysis Example

Item	Budgeted	Actual	Variance	Type
Revenue	$100,000	$120,000	$20,000	Favorable
Cost of Goods Sold	$50,000	$55,000	-$5,000	Adverse
Operating Expenses	$20,000	$18,000	$2,000	Favorable

general tips

If you have case studies, here is what you could do:

Do some background research of the business or the brand.
Identify the relevant theory by finding the chapter, section, ... in your textbook.
Adapt the elements from the theory to your case study: What is the source of the problem that is discussed in the case study?
Propose a solution based on the issue that you have identified in the previous step.

Which of the following is true about zero-based budgeting?

A. It starts from a "zero base" and every function is analyzed for its needs and costs.
B. It involves adjusting the previous year's budget by a fixed percentage.
C. It focuses only on variances between actual and budgeted figures.
D. It is mainly used for capital budgeting.

What is the primary purpose of variance analysis in budgeting?

A. To determine the most cost-effective suppliers for a business.
B. To compare actual financial outcomes with budgeted figures and analyze the reasons for any differences.
C. To calculate the total budget required for the next financial year.
D. To assess the overall financial health of a company.

What is the main advantage of using delegated budgets within an organization?

A. They ensure centralized control over all financial decisions.
B. They increase motivation and accountability among individual managers.
C. They simplify the budgeting process, requiring less time and fewer resources.
D. They provide more accurate financial forecasting.

What is a key feature of flexible budgeting?

A. It remains unchanged throughout the fiscal year.
B. It is based on fixed performance targets.
C. It adjusts to changes in activity or volume levels.
D. It is used only for capital expenditure planning.

What is a characteristic feature of incremental budgeting?

A. It involves starting the budget process from a zero base each year.
B. It adjusts the current budget based on actual performance in the previous period.
C. It bases the new budget on the previous period's budget with incremental adjustments.
D. It requires a complete reassessment of all budget items each year.

2iec Exam Overview

Paper 1 - 40 marks - 75 minutes
Paper 2 - 60 marks - 90 minutes

2iec Exam Overview

Paper 1 - 40 marks - 75 minutes

Section A : short questions
(2, 3, and 5 marks)
Section B : analyse (8 marks) and evaluate (12 marks)

Paper 2 - 60 marks - 90 minutes

2iec Exam Overview

Paper 1 - 40 marks - 75 minutes
Paper 2 - 60 marks - 90 minutes

contains two extracts
2 $\times$ four short questions
(1, and 3 marks)
2 $\times$ analyse (8 marks) and evaluate (12 marks)

Paper 1

Define (KN,UN) - 2 marks
Explain (KN,UN,APP) - 3 marks
Analyse (KN,UN,APP,AN) - 5 marks
Analyse (KN,UN,APP,AN) - 8 marks
Evaluate (KN,UN,APP,AN,EV) - 12 marks

Paper 2

Identify (KN,UN) - 1 marks
Explain (KN,UN,APP) - 3 marks
Calculate (KN,UN,APP) - 3 marks
Analyse (KN,UN,APP,AN) - 8 marks
Evaluate (KN,UN,APP,AN,EV) - 12 marks

Formulae

revenue (sales or turnover) =
selling price per unit $\times$ number of units sold
variable costs (total variable costs) =
variable cost per unit $\times$ number of units sold
total costs =
fixed costs $+$ variable costs
profit =
total revenue $-$ total costs OR
total contribution $-$ fixed costs

Formulae

growth rate (%)

$ \frac{ \text{ starting value } - \text{ end value } }{ \text{ end value } } \times $ 100

Formulae

market capitalisation of a business =
number of issued shares $\times$ current share price

Formulae

expected value of a decision with two possible outcomes eg. A & B =
[pay-off of A $\times$ probability of A]
$+$
[pay-off of B $\times$ probability of B]
net gain =
expected value $-$ initial cost of decision

Formulae

market growth (%) =

$\frac{ \text{change in the size of the market over a period} }{ \text{original size of the market} }$ $\times$ 100

Formulae

market share =

$\frac{ {\text{ sales of business }} }{ \text{ sales of industry } } \times$ 100

Formulae

market share (%) =

$\frac{ \text{ sales of one product OR brand OR business } }{ \text{ total sales in the market } }$ $\times$ 100

Formulae

added value =
selling price
$-$
costs of raw materials

Formulae

added value =
sales revenue
$-$
costs of bought-in goods and services

Formulae

labour productivity =

$\frac{ {\text{ output over a time period }} }{ \text{ number of employees } }$

Formulae

unit costs (average costs) =

$\frac{ {\text{ total costs }} }{ \text{ number of units of output } }$

Formulae

income elasticity of demand =

$\frac{ {\text{ % change in demand }} }{ \text{ % change in income } }$

if income elasticity $\lt$ 0 then inferior good
if income elasticity $>$ 0 (large value) then branded good
if income elasticity $>$ 0 (low value) then necessity

Formulae

capacity utilisation (%) =

$\frac{ {\text{ actual output }} }{ \text{ maximum possible output } } \times $ 100

Formulae

unit cost =

$\frac{ {\text{ total cost }} }{ \text{ number of units } } $

Formulae

return on investment (%) =

$\frac{ {\text{ profit from the investment (£) }} }{ \text{ cost of the investment (£) } } \times $ 100

Formulae

gross profit =
revenue $-$ cost of sales
profit from operations (operating profit) =
gross profit $-$ operating expenses
profit for year =
operating profit
$+$ profit from other activities
$-$ net finance costs
$-$ tax

Formulae

gross profit margin (%) =

$ \frac{ \text{ gross profit } }{ \text{ revenue } } \times $ 100
profit from operations margin (%) (operating profit margin) =

$ \frac{ \text{ operating profit } }{ \text{ revenue } } \times $ 100

Formulae

profit for year margin (%)

$ \frac{ \text{ profit for year } }{ \text{ revenue } } \times $ 100

Formulae

variance =
budgeted figure $-$ actual figure

Formulae

contribution per unit =
selling price $-$ variable costs per unit
total contribution =
contribution per unit $\times$ units sold
OR
total contribution =
total revenue $-$ total variable costs

Formulae

break-even output =

$\frac{ \text{ fixed costs } }{ \text{ contribution per unit } }$
margin of safety =
actual level of output
$-$ break-even level of output

Formulae

labour productivity =

$\frac{ \text{ total output in time period } }{ \text{ total staff employed } } $

Formulae

absenteeism (%) =

$\frac{ \text{ number of staff absent } }{ \text{ total number of staff} } \times $ 100

Formulae

labour turnover =

$\frac{ \text{ number of staff leaving (leaving in 1 year) } }{ \text{ number of staff employed by the business } } \times$ 100

Formulae

employee costs as percentage of turnover =

$\frac{ \text{ employee costs } }{ \text{ turnover } } \times$ 100

Formulae

labour cost per unit =

$\frac{ \text{ labour costs } }{ \text{ units of output } } $

Formulae

return on capital employed (ROCE)(%) =

$\frac{ \text{ operating profit } }{ \text{ total equity + non-current liabilities } } \times $ 100

where

$ \text{total equity} + \text{non-current liabilities} $
$= \text{capital employed}$

Formulae

current ratio =

$\frac{ \text{ current assets } }{ \text{ current liabilities } } $

Formulae

gearing (%) =

$\frac{ \text{ non-current liabilities } }{ \text{ total equity + non-current liabilities } } \times $ 100

where

$\text{total equity} + \text{non-current liabilities}$
$ = \text{capital employed}$

Formulae

payables days =

$\frac{ \text{ payables } }{ \text{ cost of sales } } \times$ 365

Formulae

receivables days =

$\frac{ \text{ receivables } }{ \text{ revenue } } \times$ 365

Formulae

inventory turnover =

$\frac{ \text{ cost of sales } }{ \text{ average inventories held } } $

Formulae

average rate of return (%) =

$\frac{ \text{ average annual return (£) } }{ \text{ initial cost of project (£) } } \times$ 100

Sample answers

Evaluate the value of historical budgeting in a company's financial planning (12 marks). link
Evaluate whether the change in price of jet fuel may affect an flight company's management of its working capital (12 marks). link

Sharing the Future (NHK)

Sharing the Future : Creating the future together. Inspiring stories of projects by Japanese people working with communities in developing countries with new ideas and efforts to help solve issues.

The Rise and Fall of Nokia Mobile

The Rise And Fall Of Nokia Mobile : Once upon a time there was a large Finnish company that manufactured the world's best and most innovative mobile phones. Nokia's annual budget was larger than that of the government of Finland and everyone who worked there shared in the windfall. But global domination cost the company its pioneering spirit and quantity gradually took over from quality, with new phone models being churned out by the dozen. Market share eroded, until in 2016, mobile phone production in Finland ceased.

The Rise and Fall of Nokia is a wry morality tale for our times, told by those that lived and worked through the rollercoaster years in a company that dominated a nation.

essay-style questions (s23)

inventory, supply chain management, operations (s23_11)

Analyse two benefits to a business of holding high levels of inventory. [8 marks]
Evaluate whether supply chain management is the most important operational activity to the success of a manufacturer of electric cars. [12 marks]

SMART objectives, ethics, human resource management (s23_11)

Analyse two reasons why a business should set SMART objectives. [8 marks]
'Ethics should always influence the human resource management (HRM) activities of a mining business.'
Evaluate this view. [12 marks]

source of finance, working capital (s23_12)

Analyse two benefits to a business of government grants as a source of finance. [8 marks]
Evaluate whether the most likely reason for the failure of a small retailer is poor management of its working capital. [12 marks]

unique selling point, marketing (s23_12)

Analyse two benefits to a business of having a product with a unique selling point (USP). [8 marks]
'Marketing is the most important factor that will affect the success of a new coffee shop.'
Evaluate this view. [12 marks]

cash flow forecast, break-even analysis (s23_13)

Analyse two purposes of a cash flow forecast for a business. [8 marks]
Evaluate whether break-even analysis is the most important finance activity for a new manufacturer of bicycles. [12 marks]

external recruitment, motivated workforce (s23_13)

Analyse two benefits to a business of using external recruitment to employ a manager. [8 marks]
'A motivated workforce is the most important factor for the success of a low-price airline.'
Evaluate this view. [12 marks]

case study (s23)

bank overdraft, marketing mix (extract and s23_21)

Analyse one advantage and one disadvantage to GR of using a bank overdraft. [8 marks]
Evaluate whether price or promotion is the most important element of GR's marketing mix. [12 marks]

motivation, operations (extract and s23_21)

Analyse two ways DC can motivate young people to work on its farms. [8 marks]
Evaluate whether DC should grow its operations by opening its new cocoa processing factory. [12 marks]

training, cost information (extract and s23_22)

Analyse two benefits to OFD of offering induction training to all employees. [8 marks]
Evaluate whether Markus needs accurate cost information before setting up OFD. [12 marks]

growth, marketing mix, product life cycle (extract and s23_22)

Analyse one advantage and one disadvantage to MXB of growing by launching a new product range of electric scooters. [8 marks]
Evaluate how MXB can change its marketing mix to extend the product life cycle of its range of mountain bikes. [12 marks]

costs, batch production, mass customisation (extract and s23_23)

Analyse two impacts on FM's costs if it enters international markets. [8 marks]
Evaluate the impact on FM's stakeholders of a change from batch production to mass customisation. [12 marks]

sources of finance, management style (extract and s23_23)

Analyse two sources of finance GD could use to open its new shop. [8 marks]
Evaluate whether Steve's management style will contribute to GD's future success. [12 marks]

sample student answers (not Cambridge!)

cost competitiveness, differentiation, Porter's theory of competitive advantage (student answer)

Nike is aiming to achieve competitive advantage in the global sports footwear market. In order to do this Nike could focus on cost competitiveness or differentiation.

Evaluate these two options and recommend which one is most suitable for Nike to maintain its global competitiveness. [20 marks]

cash flow, profit, internal and external sources of finance (student answer)

Liz and Les have set themselves the objective of managing Bluebells’ finances more effectively. They are considering whether to focus more on improving cash flow or increasing profit.

Evaluate these two options and recommend which one is more suitable for Liz and Les to achieve this objective. [20 marks]

organsational structure, flexible working practice, motivation, customer service, costs, profits (student answer)

Starbucks aims to improve employer-employee relations in its USA stores. To do this, Starbucks could either focus on changing its organisational structure, or extend its flexible working practices for employees.

Evaluate these two options and recommend which one is the most suitable for Starbucks to improve its employer-employee relations. [20 marks]

global niche market, global mass market (student answer)

Haier is aiming to continue its global expansion in the white goods market. It could do this by focusing on either global niche markets or global mass markets for white goods.

Evaluate these two options and recommend which approach is most suitable for Haier. [20 marks]

profitability (student answer)

VW's new Chief Executive has been given the aim of increasing the company's profitability. The two options VW is considering are to develop a new range of self-driving cars or to improve productivity.

Evaluate these two options and recommend which is most suitable to achieve the aim of increasing profitability, for a business such as VW. [20 marks]

general exam tips

general tips

it is good practice to show knowledge of key terms in questions by defining them at the start of a response (this is not the only approach to gaining the Knowledge mark)
it is not always necessary to write lots and fill all lines available - stay focused
make sure to link each sentence and paragraph back to the question
makes extensive use of the extract and context
read all the data in an extract, including any footnotes or additional information - this is usually included to make the information as accurate as possible
to write the best answers possible, link theoretical knowledge to the global context

general tips

response can be too long - you should aim to write concise responses in order to free up more time for the other questions
fewer arguments that are well developed and consistently supported by the context will enable candidates to access the higher levels of the mark scheme
prepare well by thoroughly revising each topic in the speciﬁcation (for example working capital is a concept that many learners struggle with)
learners should prepare well by thoroughly revising each topic in the specification

general tips on calculations

always complete calculations to 2 decimal places
for calculation questions, it is advised that candidates show each stage of their workings - this enables marks to be awarded even if the final answer is incorrect
in case you don't know the calculation - stating the correct formula could award you marks and show understanding
with calculation questions, it is always a good idea to state the formula first

general tips for business essays (1/2)

use an opening paragraph to explain what the key term means, followed by two paragraphs, each one assessing a one side of your argument
Knowledge can be demonstrated by defining key terms at the beginning of a response
arguments need to be well developed with coherent chains of reasoning and consistently supported by context
use paragraphs in responses to make it clear that you are making a new point, especially if it is a contrasting argument
to be fully balanced, a response needs to have complete chains of reasoning for both sides of an argument
learners are expected to provide a final judgement and/or conclusion
in evaluate questions, recommendations should be supported by quantitative or qualitative data

general tips for business essays (2/2)

learners should be encouraged to make fewer arguments but to ensure that they are well developed and contextualised
make use of theory to justify the overall recommendation
be specific! for example learners are expected to focus on the usefulness of SWOT in terms of helping continued success, rather than a generic response on how SWOT can be used
evaluate questions always require learners to provide a balanced response with arguments both for and against
the concept of cash flow verses profit is a difficult one for many learners (read the evaluate question from previous section)