3.3 Costs and Revenues

a) The following types of cost, using examples. AO2

• Fixed

• Variable

• Direct

• Indirect/overhead

b) Total revenue and revenue streams, using examples AO2

Average costs

This is the cost per unit of output. It is calculated by the formula: AC = TC ÷ Q where:

• AC = Average cost

• TC = Total cost, and

• Q = Quantity of output

Average revenue

This is the amount a business receives from its customers per unit of a good or service sold. Mathematically, AR = TR ÷ Q = P where:

• AR = Average revenue

• TR = Total revenue

• Q = Quantity of output, and

• P = Price

Costs

The charges that an organization incurs from its operations, e.g., rent, wages, salaries, and insurance.

Direct costs

Costs that are clearly associated with the output or sale of a certain good, service or business operation, e.g., raw materials.

Fixed costs

Costs that do not change with the level of output, e.g., loan repayments and management salaries.

Indirect costs

Also known as overhead costs, these costs are not easily identifiable with the sale or output of a specific good, service or business operation.

Price

Also known as average revenue, this is the amount of money a product is sold for.

Revenue

The money (income) received by a business from the sale of goods and/or services.

Revenue stream

The different sources of revenue (or income) for a business, e.g., revenue from sponsorship deals, merchandise sales, membership fees and royalties.

Total costs

This refers to the aggregate amount of money spent on the output of a business. The formula is: TC = TFC + TVC where:

• TC = Total costs

• TFC = Total fixed cost, and

• TVC = Total variable cost.

Total revenue

This is the sum of income received by a business from its trading activities. It is calculated using the formula: TR = P × Q.

Variable costs

Costs that change with the level of output - they rise when output or sales increase, e.g., raw materials and packaging costs.