❤️‍🔥 3.3 Costs and Revenues

Costs

Charges that an organization incurs from its operations.

Example of costs

• Purchase of raw materials

• Purchase of stocks

• Rent

• Salaries

Fixed Costs

Do not change with the level of output and have to be paid regardless of how much is sold

Examples of fixed costs

Rent, insurance, and leasing costs.

Variable costs

Firm’s expenditure that change with the level of output.

Examples of variable costs

Cost of purchasing raw materials, wages, and commission.

Total cost

Fixed costs + variable costs.

Average cost

Extent to which a firm experiences economies of scale.

= Total costs / Units of output

Direct costs

Items of expenditure that can be evidently and explicitly associated with the sale of goods and services and business activity.

Examples of direct costs

Fixed: rent of production facility

Variable: Motor insurance depreciation costs

Indirect (overhead costs)

Not easily identifiable with the sale of a good or business operation.

Examples of indirect costs

• Salaries

• Utility bills

• Legal and accounting fees

Profitability ratios and costs

Direct costs affect GPM

Indirect costs affect profit margin

Revenue

Money coming into a business from the sale of goods and services.

Revenue streams

Various sources of revenue for a business.

Total revenue (TR)

Sum of income received by a business from its trading activities

Average revenue (AR)

Amount a business receives from its customers per unit of a good or service sold

AR = P

Examples of revenue streams

• Transaction fees

• Membership fees

• Royalties

• Merchandise

• Sponsorship revenues

• Advertising revenues