ABSTRACT
You should now be clear that the first and most important question to ask of any business is: ‘is the selling price higher than the cost?’ There is little point running say a 50,000 seat stadium if at the end of a game you have made a loss because the costs have been higher than the selling price. Given that it is costs which determine whether or not there is any profit left from the revenue, it is clearly important that we understand the nature of costs and how they behave in practice. How difficult would it be to manage a stadium effectively if you did not know what costs you incurred, how many seats you had available to sell, and what price you should sell them at? Without such information you cannot make sensible decisions about controlling costs, increasing revenue, and ultimately maximizing profitability. It is to address these sorts of issues that some simple cost accounting techniques can provides us with a framework through which we can plan, make decisions, and control our businesses. Everything in business life has a cost, for example sport facilities need: staff, insurance, electricity, water, marketing, and maintenance expenditure. These costs will behave in different ways depending on the courses of action (or strategies) that are being implemented. It is therefore essential that we know about cost behavior and can model it accordingly. A new question to add your list is ‘how much do I need to sell in order to break even?’ To begin to answer this question we need to know about the types of cost that exist and how they behave under certain business circumstances. The most basic type of cost is the ‘fixed cost’, which is a form of expenditure that does not vary in the short term relative to the level activity. There is a lot going on in this definition so we can unpack it by using an example. Consider the case of a stadium manager of a professional soccer club who earns $100,000 per year. At this stadium there might be 20 home games per season plus any number of extra events such as exhibition matches, private hires, and conferences – to name a few. Over the duration of a financial year (12 months) the salary of the manager will not change, nor will
it change if there are 25 home matches or 15 home matches, or any variation in the number of other events staged. So in the context of looking at the cost of the stadium manager, we can say that for over the next year his or her salary of $100,000 is a fixed cost relative to the level of activity taking place. We can model this situation as shown in Figure 9.1.
