3.2 Cost and revenues

Page 1

3.2 Costs and Revenue

Costs and Revenue Cost: total expenditure incurred by a business in order to run its operations

Revenue: a measure of the money generated from the sale of goods and services

Profit: Difference between revenue and cost. Profit = Revenue - Cost.

Costs Fixed Costs:

costs that do not change with the amount of goods or services produced.

E.g. Rent, Salary, etc.

Variable Costs:

Costs that change with the number of goods or services produced.

E.g. Cost of raw material, electricity bill (used for production), etc.

Semi-variable Costs:

Cost that consists both fixed and variable components.

E.g. Labor costs

Direct Costs:

Costs that can be identified with the production of specific goods or services.

E.g. Packaging costs

Indirect Costs:

Costs that are not identified with the production of specific goods or services. They are also known as overheads or overheads costs.

E.g. Administrative fees, legal expenses, etc.

Revenue Total Revenue:

The total amount of money a firm receives from the sale of goods or services. This is calculated by multiplying the price per unit by the number of units sold.

It is also known as sales or turnover.

E.g. Sold 5000 units of comic books. Price per unit of each comic book $3.

Total revenue = price per unit x number of units sold = 3 x 5000 = $15000

Rental income:

Income a firm receives for giving its property on loan to other parties.

E.g. A business has an unused land and gives it to another business on rent of $500. $500 is the rental income

Sale of fixed assets:

Income received from selling of unused or underutilized assets in a business.

E.g. Sold old machinery and received $200.

Dividends:

The business could be a shareholder in another business and is entitled to receive dividends, which is the share of profits to its shareholders (private limited company or public limited companies).

Interests on deposits:

Receiving interest from banks for a deposit in the bank account.

E.g. A business has $100000 deposited in bank and the interest rate on deposit is 3% per annum. The business will receive an interest on deposit of $3000 annually.

Donations:

Received donations made by other businesses or individuals.

*Usually applies to NGOs and charitable organizations*

Grants/Subsidies:

Financial support by the government to help a business or if the business plays a role in fulfilling government's objectives.