3.3 - Costs & Revenues

Business expenditure

Business expenditure is the money you spend 'wholly and exclusively' for your business

• All businesses have to spend money in order to earn money.

• These are referred to as costs.

• i.e. the expenditure in producing a good/service

Businesses need to pay for:

• Set-up costs – items of expenditure needed to start a business.

• Running costs – the ongoing costs of running the business.

Fixed Costs

Fixed costs are the costs that do not vary with the level of output. They exist even if there is no output.

Examples of Fixed Costs

• Rent on leased premises

• Market research

• Interest payments on bank loans

• Management salaries

• Advertising expenditure

• Security

Variable Costs

Variable costs are the costs of production that change in proportion to the level of output, such as raw materials and hourly wages of production workers.

• If output is zero, then total variable costs are zero

Examples of Variable Costs

• Raw materials

• Wages

• Commission payments to staff

• Utilities

• Packaging

• Repair and maintenance

Total costs

the sum of all variable costs and all fixed costs of production

Direct versus indirect/overhead costs

Direct costs

• These are costs specifically attributed to the production or sale of a particular good or service

• Typically, these are also variable costs.

Indirect (overhead) Costs

• These are costs that do not directly relate to the production or sale of a specific product

• Typically, these are also fixed costs.

• However, unlike fixed costs, overheads are difficult to identify with a particular business activity

Fixed/variable and direct/indirect costs for a coffee house

Cost

1. Rent for premises

2. Advertising costs

3. Wages for baristas

4. Legal expenses

5. Utilities

6. Salaries for administrative staff (e.g. finance manager, marketing manager)

7. Raw materials (e.g. coffee beans, milk, paper cups)

8. Insurance

Fixed or variable	Direct or indirect
Fixed	Direct
Fixed	Indirect
Variable	Direct
Fixed	Indirect
Variable	Direct
Fixed	Indirect
Variable	Direct
Fixed	Indirect

Calculating total revenue

Refers to the money coming into a business. usually from the sale of good and/or services.

• This is known as sales revenue.

The formula for sales revenue is:

• Sales Revenue = Price x Quantity Sold

Revenue streams

refers to the money coming into a business from its various business activities, such as sponsorship deals, merchandise and receipt of royalty payments.

Examples of Revenue Streams

• Advertising

• Transaction fees

• Franchise costs and royalties

• Sponsorships

• Subscriptions

• Merchandise

• Dividends

• Donations

• Interest earnings

Revenue

is the money that a business earns from the sale of goods and/or services. It is calculated by multiplying the unit price of each product by the quantity sold.

Profit

exists if there is a positive difference between a firm's total revenues and its total costs

Price

refers to the amount of money a product is sold for. It is the sum paid by the customer to purchase a good or service.

Running Costs

the ongoing costs of operating the business

Set-up costs

items of expenditure needed to start a business