3.2 Costs & Revenues
Types of Costs
Fixed costs
Refers to the costs of production that the business has to pay regardless of output
These include:
Rent
Internet
Insurance
Lease on machinery
Variable costs
Refers to the costs of production that change in proportion with the level of output or sales
These include:
Raw materials
Gas/oil for machinery and delivery trucks
Wages (ONLY IF paid by product made not by time)
Electricity
Total Costs
Starts at fixed costs
Increases in direct proportion with output.
(its basically your variable costs but starting at the fixed costs)
Semi-variable costs
Semi-variable costs contain an element of both fixed and variable costs. These tend to change only when production or sales exceed a certain level of output.
These include:
Water bills
Telephone bills
Semi-variable costs example:
Mobile telephone and internet service providers often allow a user to have a predetermined number of 'free minutes' or a limit on data usage. However, there is also a 'standing charge' which means no matter how much (or little) the person uses the phone or internet, there is a fixed minimum monthly charge. If the user exceeds the quota, then the telephone and internet bills become variable.
Direct costs
For example: BSM's output is learning. Direct costs would be:
Textbooks
Raw materials
Subscriptions to learning tools
Wages (per unit)
Related to an individual project or the output of a particular product; without which the costs would not be incurred.
In-direct costs (Overheads)
For example: BSM's output is learning. Indirect costs would be:
Electricity (for utility use)
Tables and chairs
Salaries
Water bills (for utility use)
Insurance
Advertising
These cannot be clearly traced to the production or sale of any single product.
For example: Rent is considered an overhead as it may include different parts of the business, not a production or product.
Differences between cost and price
Cost is the capital invested in production
Price refers to the amount the product is sold for
Revenue is
Quantity sold X Price = Sales Revenue
Profit is
Sales Revenue - Total Costs = Profit
Revenue
What is Revenue?
Refers to the money coming into a business, usually from the sale of goods and/or services(known as sales revenue).
Calculated through: sales revenue = price * quantity sold
Revenue Streams
Revenue does not only come from the sale of goods and services. Money can come into a firm from other means, known as revenue streams, depending on the type of firm and its activities.
Types of Revenue Streams:
Advertising revenue
Advertising another company within your company
For example: Google, Facebook and Twitter heavily relies on this form of revenue
Subscription fees
Charges imposed on customers who use or access the company's service or goods
Merchandise
Usually sold by service providers
For example: Movie establishments sell popcorn and snacks
Dividends
Being a shareholder of other companies entitles a business to payments of any declared dividends.
Donations
These are financial gifts from individuals or other organizations to a business.
Interest earnings
Businesses can earn interest on their cash deposits at the bank
Transaction fees
These fees are imposed by companies to customers.
Franchise costs and royalties
Sponsorship revenue
Sponsorship is a form of below-the-line promotion (see Unit 4.5) whereby the sponsor financially supports an organization in return for prominent promotional display of the donors brand trademark
Subventions
These are subsidies offered from the government to certain businesses to help reduce their costs of production.
Review Questions for 3.2 - Costs & Revenues
- Explain the difference between price and cost.
- Distinguish between fixed, variable, direct and indirect costs of production.
- What are semi-variable costs?
- How are total costs calculated?
- What is revenue and how is it calculated?
- Explain, with the use of examples, the meaning of revenue streams.