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

  1. Explain the difference between price and cost.

  2. Distinguish between fixed, variable, direct and indirect costs of production.

  3. What are semi-variable costs?

  4. How are total costs calculated?

  5. What is revenue and how is it calculated?

  6. Explain, with the use of examples, the meaning of revenue streams.