3.03 Costs and Revenues

Cost

The 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

Calculated by finding out the difference between revenues and costs. A high positive difference is a good indicator of business success and also means high profit.

Type of Costs

• Fixed

• Variable

• Semi-variable

• Direct Cost

• Indirect Cost

Fixed Costs

Costs that do not change with the amount of goods or services produced. You pay regardless of how much you sell. It can still change, but it's independent of the number of outputs.

Variable Cost

Costs that change with the number of goods or services produced. It is proportional to the output produced. If output doubles, variable costs also double.

Semi-variable

Costs comprising fixed and variable costs. Tend to change only when production or sales exceed a certain level.

Direct Costs

Costs that can be identified with the production of specific goods or services. This can be specifically related to an individual project or the output of a particular product

Indirect

Costs that are not clearly identified with the production of specific goods or services. Rent and lighting can be linked to all areas of the business, not just specific parts. Advertising, legal, and insurance.

Total Cost

Total Variable Cost + Total Fixed Cost

Sales Revenue

Price x Quantity

Revenue Streams

It doesn’t only come from sales of goods. It also includes, for instance, transaction fees, franchise and royalties, dividends and so on.