It sounds blindingly obvious, but your maths skills could let you down if they are not up to scratch, says leading accountancy tutor Gareth John
I was in class the other day and we were calculating the total cost of 10 units that had a purchase price of £5 each. At least half of my class picked up their calculators! After mocking them mercilessly for five minutes I reminded them that as wannabe accountants who would be spending their careers recording, analysing and communicating financial information they needed to be comfortable with figures, numbers and basic calculations.
A common cause of failure in many of the assessments is that students lack the basic mathematical ability to deal with simple numbers.
Let’s look at a few of the situations where a basic level of mathematical competence is required…
When businesses are dealing with large volumes of production involving large amounts of resource and large costs, it is useful to be able to break these down into averages. This allows us to consider things on a smaller scale.
For example, if we produced 100,000 units using 200,000 kg of material then the average amount of material per unit would be 200,000 kg/100,000 units = 2 kg per unit. This can be useful for:
• Helping to plan resource requirements. If we are going to produce 2,000 units next week then we need to purchase around 4,000 kg of materials.
• Identifying unit production costs. If material costs £5 per kg then the total material cost per unit would be £10.
• Setting prices. Once we have worked out the average costs for making a unit we can add a margin to set a profitable price.
The main thing to be careful about when calculating averages is that you divide the two figures ‘the right way around’. A common mistake is that students divide them ‘the wrong way around’ – that is they work out 100,000/200,000 = 0.5 kg per unit rather than the correct 2 kg per unit.
Percentages are a useful way to look at how figures are changing. If I tell you that the price of a car has changed from £13,500 in year 1 to £14,850 in year 2, then we can see that the price has risen between the two years, but it is not immediately clear by how much. Using percentages (‘per cent’ means ‘parts of a hundred’) can make this much clearer.
To work out the increase as a percentage we can first work out the increase in pounds. £14,850 – £13,500 = £1,350. We normally work out percentage changes based on the starting figure, so in this case we would work it out as £1,350/£13,500 x 100 = 10%.
Another way to work this out is to calculate £14,850/ £13,500 which gives 1.1 which is ‘1 + the percentage increase as a decimal’ or ‘1 + 0.1’ or ‘1 + 10%’. As ever make sure you divide the two figures ‘the right way around’ with the starting figure at the bottom.
Margin and mark-up info
The relationship between costs and prices is a critical one in any business as it determines the profit (or loss) that is made.
Margin is short for ‘margin on sales’, so the profit element is shown as a percentage of the sales value.
Mark-up is short for ‘mark-up on cost’ so the profit element is shown as a percentage of the cost.
Here are a few examples.
• If the sales price is set at £190 and the company has a target profit margin of 40% what is the maximum target cost that they can afford to incur?
• If a company has a target profit margin of 25% and spends £150 producing a unit what must the selling price be set at?
• If the sales price is set at £190 and the company uses a mark-up of 40% what is the production cost of the product?
• If a company spends £150 producing a unit and sets the price to give a mark-up of 25% what will the selling price be?
If you wish to discuss anything that Gareth John has covered about feel free to get in touch.
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