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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.

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