Finance 3.3, costs and revenues

Cost

refers to the total expenditure incurred by a business in order to run its operations

Fixed cost

costs that do not change with the amount of goods or services produced; these have to be paid regardless of business activity

Variable cost

costs that change with the number of goods or services produced; these expenses change in proportion to business activity

Direct cost

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

Indirect cost (overhead)

costs that are not clearly identified with the production of specific goods or services

Revenue

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

Total revenue

income gained from the sale of goods and services; also known as sales revenue or sales turnover

Revenue streams

examples of these include rental income, sale of fixed assets, dividends, interests on deposits, donations, grants, and subsidies

Contribution per unit

refers to the difference between the selling price per unit and variable cost per unit

Total contribution

calculated when more than one unit is sol; it is found by subtracting the total variable costs from the total sales revenue

Profit

obtained by subtracting total fixed costs from the total contribution

Break-even quantity/point

the total costs equal the total revenue

Profit

any sales that exceed the break-even quantity

Losses

sales that are less than the break-even quantity

Margin of safety

also known as the safety margin; a measure of the difference between the break-even level of output and the actual (current) level of output; the range of output over which profit is made

Target profit output

the level of output that is needed to earn a specified amount of profit

Break-even chart

graphical method that measures the value of a firm's costs and revenues against a given level of output and helps in identifying the break-even point