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PRACTICE ECONOMICS…1 Ms Rosmin Bt Iqbal Hussain BOptom (UKM), CMBA (UNIMAS)

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Introduction <ul><li>Hi! Today I am going to teach you about economics of practice . </li></ul><ul><li>We shall learn accountings & finance of a business practice </li></ul>

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Entrepreneur <ul><li>“ I am fantastic! I just thought of a new idea: a bowling ball that expands as you throw it so that it is guaranteed to knock down every pin! I am going to be famous!” </li></ul>I saw my friend Cole walking down the street. “How are you today?”, I asked Cole.

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What is an entrepreneur ? <ul><li>Cole is an entrepreneur . An entrepreneur is a person who comes up with a product or service, or a better way to produce one / provide one </li></ul><ul><li>He found the resources, the money, and the time to produce a new product / service </li></ul>

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Specialization <ul><li>Adam Smith and the “division of labor” </li></ul><ul><li>Don’t try to do everything! </li></ul><ul><ul><li>It’s more costly and less efficient </li></ul></ul><ul><li>Focus your prime target on producing only a few specialist goods / services </li></ul><ul><ul><li>It lowers costs and increases efficiency </li></ul></ul>

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Specialization…cont <ul><li>The practice owner counted on others to do the necessary work of sales & “job completion”, but then he would examine the customers himself & conduct the eye examination entrance test as a bonus to customers </li></ul>Specialization is when an individual or a company specializes in doing one part of a task, and relies on others to complete the other parts

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Profits <ul><li>Total Profits = T Revenues – T Costs </li></ul><ul><li>What Revenues? </li></ul><ul><li>What are Costs? </li></ul>

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Revenue <ul><li>Total Sales = Revenue </li></ul><ul><li>Revenue = cost of goods sold + mark-up </li></ul><ul><li>Revenue = price of perunit good sold x total units </li></ul><ul><li>P x Q </li></ul><ul><li>Goods = tangible goods / intangible (services) </li></ul>

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Costs <ul><li>Opportunity costs </li></ul><ul><li>Fixed Cost </li></ul><ul><li>Variable cost </li></ul><ul><li>Product Cost </li></ul><ul><li>Period Cost </li></ul><ul><li>Unit Cost </li></ul><ul><li>Total cost TC = VC + FC </li></ul>

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Opportunity Costs <ul><li>Opportunity cost is the process of choosing one good or service over another </li></ul><ul><li>The item that you don’t pick is the opportunity cost </li></ul><ul><ul><li>The spectacles is Sara’s opportunity cost </li></ul></ul><ul><ul><li>The edging machine is Andy’s opportunity cost </li></ul></ul>Opportunity Costs Rm170 Rm240: color CL Purchases Rm240

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Questions <ul><li>What is your opportunity cost when you start an optometry practice? </li></ul><ul><li>Capital = cud be used for direct investments / FDI </li></ul><ul><li>Time & energy = to work as an employee & enjoy </li></ul><ul><li>Anything else?? </li></ul>

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Opportunity Cost & Comparative Advantage <ul><li>Compares producers of a good / services according to their opportunity cost </li></ul><ul><ul><li>Whatever must be given up to obtain some item </li></ul></ul><ul><li>The producer who has the smaller opportunity cost of producing a good / service is said to have a comparative advantage in producing that good / service </li></ul><ul><li>Specialize in producing the goods /service for which you have the lowest opportunity cost </li></ul>

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Question <ul><li>What are your comparative advantages you can think that you could have for your practice? </li></ul><ul><ul><li>Services… </li></ul></ul><ul><ul><li>Goods… </li></ul></ul>

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Profit & Loss Accts

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Product Costs <ul><li>Costs that “attach” to the units that are produced (i.e., manufacturing costs) and are not reported expenses until the goods are sold </li></ul><ul><ul><li>Direct costs </li></ul></ul><ul><ul><li>Indirect costs </li></ul></ul><ul><li>Cost Assignment </li></ul><ul><ul><li>Direct costs are traced to a cost object </li></ul></ul><ul><ul><li>Indirect costs are allocated or assigned to a cost object </li></ul></ul><ul><li>Both direct & indirect costs can be either fixed or variable </li></ul>

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Product Costs…cont <ul><li>Direct Costs </li></ul><ul><ul><li>Costs that can be traced to a given cost object (product, department, etc.) in an economically feasible way </li></ul></ul><ul><ul><ul><li>Salary of direct labor of production </li></ul></ul></ul><ul><ul><ul><li>Employee benefits of direct labor of production </li></ul></ul></ul><ul><ul><ul><li>Consultant fees of production </li></ul></ul></ul><ul><ul><ul><li>Travel </li></ul></ul></ul><ul><ul><ul><li>Materials </li></ul></ul></ul><ul><ul><ul><li>Supplies </li></ul></ul></ul><ul><ul><ul><li>Equipment of direct production </li></ul></ul></ul><ul><ul><ul><ul><li>Which is fixed & which ones are variable cost? </li></ul></ul></ul></ul>

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Product Costs…cont <ul><li>Indirect Costs </li></ul><ul><ul><li>Costs that cannot be traced to a given cost object in an economically feasible way. These costs are also known as “overhead” . Not associated with a particular operation </li></ul></ul><ul><ul><ul><li>QA </li></ul></ul></ul><ul><ul><ul><li>Design services </li></ul></ul></ul><ul><ul><ul><li>Allocation for R&D </li></ul></ul></ul><ul><ul><ul><li>Costs related to ongoing professional training of staff </li></ul></ul></ul><ul><ul><ul><li>Rental </li></ul></ul></ul><ul><ul><ul><li>Depreciation </li></ul></ul></ul><ul><ul><ul><li>Utilities bill & communication costs </li></ul></ul></ul><ul><ul><ul><ul><li>Which is fixed & which ones are variable cost? </li></ul></ul></ul></ul>

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Product Costs…cont Direct Cost A Direct Cost B Indirect Cost C Product A Product B

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Traditional Costing System

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Fixed & Variable Costs <ul><li>Fixed Cost : are those that are spent and cannot be changed in the period of time under consideration </li></ul><ul><ul><li>Costs that do not vary with the level of output </li></ul></ul><ul><ul><li>Usually refers to a short-run term </li></ul></ul><ul><ul><li>E.g: rent, rates (interest & tax), salaries, insurance </li></ul></ul><ul><li>Variable Cost </li></ul><ul><ul><li>Costs that vary with the level of output </li></ul></ul><ul><ul><li>E.g. labor (overtime, commission), bonuses, materials </li></ul></ul>

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Period Costs <ul><li>Costs that must be charged against income in the period incurred and cannot be inventoried </li></ul><ul><ul><li>E.g.: selling and administrative expense, tel, water electricity, postage, interest </li></ul></ul>

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Relationships of Types of Costs Direct Indirect Variable Fixed

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Total Cost <ul><li>Total cost TC = VC + FC </li></ul>

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Unit Cost <ul><li>Total cost of units divided by units produced </li></ul>

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Break-Even Analysis <ul><li>R(X) - VC(X) - FC = P, </li></ul><ul><li>where R = revenue (selling price ) per unit; X = number of units </li></ul><ul><li>sold or to be sold; R(X) = total revenue; FC = fixed costs; VC = variable cost per unit; </li></ul><ul><li>VC(X) = total variable costs; P = profit </li></ul><ul><li>n BEP in units = X = FC /(R-VC) </li></ul><ul><li>n BEP in dollars = FC/ (1- VC%) </li></ul>

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ACCOUNTS <ul><li>TRADING PROFIT & LOSS ACCTS </li></ul><ul><li>BALANCE SHEET </li></ul>

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TRADING PROFIT & LOSS ACCOUNTS

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Purpose of Accounts

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Purpose of Accounts <ul><li>Provide information for stakeholders – customers, shareholders, suppliers, etc. </li></ul><ul><li>Provides the opportunity for the business to monitor its own activities </li></ul><ul><li>Provides transparency to enable the firm to attract investment </li></ul><ul><li>Reduces the chance for fraud – not 100% successful!! </li></ul><ul><ul><li>E.g ENRON! </li></ul></ul>

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Profit / Loss <ul><li>Profit </li></ul><ul><ul><li>The supplier made profit when selling the Slit lamp for Rm2500 </li></ul></ul><ul><ul><li>The cost of the Slit lamp: e. g. Rm1000 </li></ul></ul><ul><li>Loss </li></ul><ul><ul><li>The optical practise made a loss when he sold the contact lenses because it was a clearing off stock sales: </li></ul></ul><ul><ul><li>Buy 1, Free 1 </li></ul></ul>

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T Profit & Loss Accts

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T Profit & Loss Account

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Tr Profit & Loss Account <ul><li>A T Profit and Loss Account shows the following information for a business over a period of time (norm. one yr) </li></ul><ul><ul><li>Sales Revenue earned by the business </li></ul></ul><ul><ul><li>Costs of Production that the business has paid </li></ul></ul><ul><ul><li>Profit earned by the business </li></ul></ul>

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Profit and Loss Account - Flow

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Profit and Loss Account <ul><li>Shows the flow of sales and costs over a period </li></ul><ul><li>Shows the level of profit or loss made </li></ul><ul><li>Shows what has been done with the profit or loss </li></ul>

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Trading Profit & Loss Account For the Year Ended (date) Debit Credit Sales Less Sales Return / Return Inward Less Cost of Goods Sold X X X = Gross Profit x Add Other Revenue / Income X Less Expenses / Overheads x = Net Profit / Loss x

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Calculating Cost Of Goods Sold (Purchases + Opening Stock) - Closing Stock of goods left - Purchase Return = CoGS (the goods that were actually sold) Purchases (Product costs: cash/cdt) X + Opening Stock (Goods oredi a/v for sale; finished goods) X <ul><li>Purchase Return / Return outward </li></ul><ul><li>(including carriage inward, custom duty, stamp duty) </li></ul>X - Closing Stock (finished goods) X = Cost of Goods Sold X

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Other Revenues / Incomes <ul><li>A sum of all of these: </li></ul><ul><li>Interest received </li></ul><ul><li>Dividend received </li></ul><ul><li>Rent received </li></ul><ul><li>Discount received </li></ul><ul><li>Commission received </li></ul><ul><li>Provision for doubtful debts (overprovided) </li></ul><ul><li>Gains of sales from fixed asset sales </li></ul>

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Income (Sales) Sources For Optometric Practice <ul><li>Merchandise: </li></ul><ul><ul><li>Spectacle frames </li></ul></ul><ul><ul><li>Spectacle lenses </li></ul></ul><ul><ul><li>Accessories </li></ul></ul><ul><li>Professional services: </li></ul><ul><ul><li>Eye examinations </li></ul></ul><ul><ul><li>Contact lens services </li></ul></ul><ul><ul><li>Shared care & co-management services </li></ul></ul><ul><ul><li>Other professional services e.g. LV, BV, …. </li></ul></ul><ul><ul><li>Subscription schemes </li></ul></ul>

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Expenses / Overheads / Operational Expenses <ul><li>Carriage outward </li></ul><ul><li>Telephone, water, electricity (inclusive: accrual expenses + actual amt paid) </li></ul><ul><li>Advertising </li></ul><ul><li>Commission paid </li></ul><ul><li>Depreciation </li></ul><ul><li>Discount allowed </li></ul><ul><li>Bad debts </li></ul><ul><li>Interest </li></ul><ul><li>Rate & rent </li></ul><ul><li>Repair & maintenance </li></ul><ul><li>Postage </li></ul><ul><li>Stationeries </li></ul><ul><li>Salaries & wages </li></ul><ul><li>General Expenses </li></ul><ul><li>Insurance </li></ul><ul><li>Provision for doubtful debt (under provided) </li></ul><ul><li>etc </li></ul>Also known as Normal Product Costs. A sum of all these: Accrual = amt pending

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Profit & Loss Account Debit Credit Sales Revenue 70,000 <ul><li>Cost of Goods Sold </li></ul>20,000 = Gross Profit 50,000 - Expenses: Wages 30,000 Marketing 5,000 Accountant 1,000 Loan Interest 4,000 = Total Expenses 40,000 = Net Profit 10,000

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BREAK

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EXTRA NOTES <ul><li>All costs which are eventually allocated to products are classified as either… </li></ul><ul><li>Direct materials, </li></ul><ul><li>Direct labor, or </li></ul><ul><li>Indirect manufacturing </li></ul>

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Direct Material Costs... <ul><li>Include the acquisition costs of all materials that are physically identified as a part of the manufactured goods and that may be traced to the manufactured goods in an economically feasible way </li></ul>

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Direct Labor Costs... <ul><li>Include the wages of all labor that can be traced specifically and exclusively to the manufactured goods in an economically feasible way </li></ul>

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Indirect Manufacturing Costs... <ul><li>Or factory overhead , include all costs associated with the manufacturing process that cannot be traced to the manufactured goods in an economically feasible way </li></ul><ul><li>manufactured = edging / completing a product </li></ul>

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Product Costs... <ul><li>Are costs identified with goods produced or purchased for resale </li></ul><ul><li>Product costs are initially identified as part of the inventory on hand </li></ul><ul><li>These costs, inventoriable costs, become expenses (in the form of cost of goods sold) only when the inventory is sold </li></ul><ul><li>refers to “raw materials”/ supplies </li></ul>

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Period Costs... <ul><li>Are costs that are deducted as expenses during the current period without going through an inventory stage </li></ul>