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IB Syllabus 3.3
IB Syllabus 3.3
The learning outcomes (or assessment objectives) for this section of the IB Business Management syllabus are:
The following types of cost, using examples (AO2):
fixed
variable
direct
indirect (overhead)
Total revenue and revenue streams, using examples (AO2)
In-Class Activities
In-Class Activities
Day 1: Research a Business’ Costs and Revenues
Day 1: Research a Business’ Costs and Revenues
Step 1: Think of a business or choose our school
Step 2: Brainstorm all the different:
Revenue streams
Costs (Classify them by including whether they are)
Variable Costs
Fixed Costs
Direct Costs
Indirect Costs
Step 3: Analyze all costs and revenues
Identify any areas where the business could potentially increase revenues or decrease costs based on your analysis
Create a make believe cost and revenue graph for one of the products or services being sold
Present to the class!
Video explaning the benefits of not reading when presenting: https://youtu.be/t5zh0kehlLg?si=iIbUZCUlGjN8w4Je&t=152
Below is a partly completed table of the fixed, variable and total costs of the Casual T-shirt Company at different quantities/output per month.
Copy and complete the table, using the figures provided to work out the missing costs.
Use the data in your completed table to draw a graph showing the relationships between the quantity/output of T-shirts and the fixed, variable and total costs of production.
Homework Answer
What you should know
By the end of this subtopic, you should be able to:
define the following terms: (AO1)
costs
fixed costs
variable costs
total costs
sales revenue
expected value
contribution
cost centre
profit centre
expected value
distinguish between fixed costs, variable costs, semi-variable costs, direct costs and indirect costs, using examples (AO2)
distinguish between revenue and revenue streams, using examples (AO2)
prepare a decision tree and recommend a course of action for a business based on the results (AO4, AO3)
https://quizlet.com/_cw1lar?x=1jqt&i=4jrhob
https://www.gimkit.com/view/64008105c3a5040037fe73b6
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.
Decision Tree / Probability tree
A decision-making tool with branches representing choices with associated costs and probabilities and results.
3.3 Extra Notes
3.3 Extra Notes
The following types of cost, using examples (AO2):
The following types of cost, using examples (AO2):
fixed
variable
direct
indirect (overhead)
- fixed costs
Fixed costs of production do not change with the level of output.
These costs that have to be paid regardless of how much is produced or sold.
Fixed Costs Examples
rent payments
insurance premiums on buildings
leasing costs of (hiring) machinery and equipment
salaries to management
Graphing Fixed Costs
Total Fixed Costs are $100,000, as shown by the y-axis intercept
Are fixed costs always the same?
FALSE!
Fixed costs can change over time, but do not change with output in the short run.
Too often, students write that “fixed costs are those that do not change” (or something similar). It is important to be aware that fixed costs can and do change, but the definition means these costs are not directly related to the level of production or the output of a business.
For example, rents can and do change over time, often due to rising demand or higher inflation (an increase in the economy's general price level). However, the change in fixed costs in not because of the firm’s output level. The same applies to salaries paid to managers, or insurance premiums paid to insurance companies.
- variable costs
Variable costs are costs that change in with the level of output
Variable Costs Examples
materials
packaging
delivery
piece-rate wages and sales commission
cleaning (hotels, for example if paid per room)
Graphing Variable Costs
Total variable costs at different levels of quantities produced (output)
Total variable costs increase as the quantity of cups of coffee increases
The variable cost curve always starts at the origin (0,0)
Total Costs
Total costs are the sum of fixed and variable costs.
Graphing Total Costs
- direct costs
Direct costs relate specifically to a particular project or product (consultancy costs, mortgage fees, etc).
Direct Cost Examples
staffing cost of employees in that particular section of the business
utility costs of a single branch of a chain store
material costs for a product line
running costs of a single store to be allocated to the correct department
- indirect (overhead) costs
Indirect costs (overheads) are costs that cannot be traced to any particular product (rent, advertising).
Indirect Costs examples
Rent on premises
Salaries for administrative staff
Utility bills (gas, electricity, and water).
General insurance for third parties, fire, and theft
nationwide advertising campaigns
accountancy and auditors’ fees
salaries of the board of directors
expenses of running a central human resources department
ICT and infrastructure costs
The head office
National advertising campaign
Board members' salaries
ICT and infrastructure costs
Top Tips: Profit and Loss Statement (3.4)
Top tip 1:
Direct costs (or cost of sales) affect the gross profit margin of the goods or services that a business provides.
Indirect costs (or overhead expenses) affect the profit margin of the business as a whole.
Top tip 2:
In determining whether a cost is direct (cost of sales) or indirect (an overhead expense), ask the following question s as rule of thumb:
If no products are sold today, this week, or this month, would you still have to pay this cost?
If the answer is "yes", then it is most likely to be an overhead, i.e., indirect cost.
If the answer is "no", then it is categorized as a cost of sales, i.e., direct cost.
Total revenue and revenue streams, using examples (AO2)
Total revenue and revenue streams, using examples (AO2)
Revenue
Revenue
Revenue is the income that a business earns from selling goods and services.
Calculating Revenue
Total revenue (TR) is the sum of income received by a business from its trading activities.
Calculated by multiplying the unit price (P) of a good or service by the quantity sold (Q)
TR = P × Q.
For example, if a campsite operator rents out 100 plots (or sites) at an average price of $45 per day, then its total revenue is
$45 × 100 = $4,500 for the day.
Graphing Revenue
Revenue earned from different quantities (output) of cups of coffee sold.
Revenue graph for a coffee shop with one coffee product
Revenue and Cost Graph
Revenue and Cost Graph
Total revenue, fixed costs, variable costs and total costs for a coffee shop with one coffee product.
Revenue Streams
Revenue Streams
A revenue stream is one specific way that a company generates income
Many businesses will sell more than one product, or perhaps different products and services. These are called different revenue streams.
Examples of various revenue streams
Dividends: organisations, just like individuals, can have shares of different companies and get interest payments. For example, Microsoft owns some Apple shares, and Porsche is the majority shareholder of Volkswagen.
Interest on deposits: another thing that organisations can do in the same way as individuals is depositing money in a bank account and getting interest earnings.
Merchandise: in addition to the main trading activity, some organisations sell their souvenirs or clothes to get extra revenues. For example, Disney, in addition to making movies, sells its merchandise (toys and clothes) to fans.
Donations: this is usually one of the main revenue streams for popular streamers on Steam and YouTube. In addition, it is one of the main revenue streams for charities.
Sponsorship deals: the way it usually works is sponsor gives you financial support in exchange for an extra advertising space and publicity. For example, Emirates airlines sponsor FC Arsenal and Arsenal players have Emirates logo on their uniforms.
Advertising revenue: this is when an organisation is offering advertising space and charges other organisations for posting ads in this space. For example, Telegram and YouTube show ads to users who have free subscription.
Subscription: there are many kinds of subscriptions nowadays and it becomes a really popular revenue stream for more and more companies. For example, Apple offer iCloud storage space in exchange for a monthly fee.
Royalties: royalty payments are made to artists for the use of their artworks (for example, if you want to use someone’s song in your film) or to franchisors for the use of franchise. Either way, royalties are payments for the use of intellectual property.
Rental income: some organisations own property that they rent out. You might be surprised but one of the main revenue streams for McDonalds is renting out its property to franchisees.
Examples of various revenue streams for selected businesses:
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