Bank Maintains Rate At Five Per Cent

Bank Maintains Rate At Five Per Cent
The Bank of England's monetary policy committee (MPC) has
decided to hold the base rate of interest at an even five
per cent.

It is the sixth interest rate decision the MPC has made so
far this year and the fourth time it has decided to
maintain the base level. The committee last decided to
alter interest rates in April when it announced a reduction
of 0.25 percentage points from 5.25 per cent. This decision
came in response to higher food and fuel prices, on top of
a depreciating strength of the pound on import prices.

Following the decision, it may well be that consumers find
that the monthly demands of mortgage and loan repayments do
not com} under further strain as the MPC looks to peg back
inflation and maintain a stable financial system.
Commenting on the decision, financial services provider
Abbey suggested that MPC members must have taken into
consideration that indications of slowing output growth
needed to be measured about expectations of future
inflation and other contractions in economic activity.

It added that the minutes of the meeting, which are
scheduled to be releasead on Wednesday June 18th, should
give additional insight into the reasons behind the
decision. The group does not rule out a further rate cut
later in the year, although points out that future
decisions will be heavily influenced by the rate of
inflation in the coming months.

Meantime, Barclays has noted that the Mpc is in a tricky
position as it looks to fulfil a double role trying to keep
inflation down and encourage economic growth.

"There is no doubt that UK economic growth is moderating -
the credit crunch has reduced the availability of credit,
the housing market is slowing down and the high street is
showing signs of softening. Real incomes are also being
squeezed by high inflation, which has the potential to
further reduce household demand. Meanwhile, inflation is
way above target and set to go even higher in the coming
months. However, as you look into 2009, slowing economic
growth should reduce capacity pressures and thus inflation
and therefore there is still the possibility the MPC could
cut interest rates later on in the year." the bank states.

Inflation is currently running at three per cent, with an
additional consumer price index decision expected on June
17th. The Council of Mortgage Lenders pointed out that its
prediction of a rate hold were fuelled by the Bank's need
to keep the rate of inflation low in a weakened economic
outlook. Meantime, it noted that a tightening in UK loans
approvals and affordability pressures in the housing
markets needed to be addressed. The group stated that it
hoped the Bank's liquidity scheme would help to alleviate
some of the pressure faced by mortgage UK loan providers
and by doing so assist struggling borrowers later in the
year.

The base rate stood at 5.5 per cent at the start of 2008,
but two cuts of 0.25 percentage points in both February and
April left the rate at a level not seen since the latter
stages of 2006. Commenting on the last rate cut, Sean
Gardner, chief executive of MoneyExpert, described the
development as a "welcome relief" for consumers.

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Accounting For Profit With Marginal Costing

Accounting For Profit With Marginal Costing
Marginal costing is an accounting term in which costs and
expenses are identified by their variability according to
the volume of goods bought or produced. By analysing costs
according to the variability in prices can significantly
improve profit efficiency levels within a business.

Business costs and expenses as expressed as a unit cost of
a product can vary significantly as purchase or production
volumes change. The first stage in using marginal costing
to generate higher levels of profit is to identify the
variability of all the individual cost elements.

Costs which are a component part of the product would
normally be classified as variable costs since each
component would require to be bought in specifically for
that product. The cost of items bought for resale would
also be classified as variable costs.

Fixed costs would be items not relating to the volume of
goods manufactured or sold. Examples would be the premises
costs, machinery costs.

A number of business expenses would be semi variable in
that they can in some circumstances be viewed as a fixed
expense but in other circumstances could also be viewed as
variable expenses. Advertising expenses might be regarded
as almost fixed expenses to promote the business or
products whereas promoting the business name would be
largely a fixed cost while specific product related
advertising might be viewed as a variable product cost.

Wages and salaries are an important cost to most businesses
and would normally be classified as semi variable.
Administration salaries are more likely to be fixed while
direct labour costs will contain both a fixed and variable
element.

To operate a marginal costing program identify the
variability of each cost item and evaluate that marginal
cost and the fixed overheads of the business. To use the
marginal costing as part of an accounting for profit
program apply different volumes to the marginal costs.

At the lowest volume the fixed costs might well exceed the
marginal profit, which in accounting terms is called the
contribution, being the difference between the selling
price and the marginal cost. The point at which the overall
volume produces neither a loss nor a profit is called the
break even point.

Break even analysis is important to ensure there is
sufficient market demand to be able to exceed the break
even point and the marketing effort will ensure that break
even point is not just reached but easily achievable.

A further stage in accounting for profit would be to plan
various volumes, the effect those volumes have on variable
costs and occasionally on fixed costs too. Determine what
is achievable and what is not achievable, the effect on the
volume of profit and set business plans accordingly.

In addition to higher volumes producing higher marginal
profits the variable costs also reduce when volumes
increase and these changes require to be accounted for.
Even if goods are being bought in purely for resale the
variable costs will vary with volumes.

Buying in 100 items of a product will be cheaper than
buying in 2 or 3. Selling and delivering the items
individually is likely to cost more in distribution co0sts
than selling in parcels of 10 or 20.

By analysing costs and their variability in relation to
actual and potential volumes gives the accountant a real
voice to influence management decisions in the way the
business plans are constructed and by routine checks on
progress using marginal costing as part of the budgeting
and reporting process maximum profits can be achieved by
accounting for profit.

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Terry Cartwright, accountant and CEO at DIY Accounting,
designs accounting software http://www.diyaccounting.co.uk/
on excel spreadsheets providing complete single and double
entry bookkeeping systems
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