3.2 Costs & revenues

Types of costs

• Direct costs: costs which can be clearly identified with each unit of production and can be allocated to a cost centre.

  • Examples:
  • One of the direct costs of a hamburger in a fast-food restaurant is the cost of the meat.
  • One of the direct costs for garage in servicing a car is the labour cost of the mechanic.
  • One of the direct costs of the business studies department is the salary of the business studies teacher.

• Indirect costs: costs which cannot be identified with a unit of production or allocated accurately to a cost centre also known as overhead costs.

  • Examples:
  • Purchase of a tractor for a farm
  • Promotional expenditure in a supermarket
  • Rent towards a garage
  • Cost of cleaning a school

• Fixed costs: costs that do not vary with output in the short run.

  • If a retail shop sold no items at all in one trading day, the costs of the shop such as rent and property tax would still have to be paid for that day. If the shop sold 1000 items, these costs would not change.

• Variable costs: costs that vary as output changes, such as the direct cost of materials a used in making a washing machine or the electricity used to cook fast-food meal.

  • If nothing is produced/sold, then variable costs will be zero.

• Semi-variable costs: costs that have both a fixed and variable cost element.

  • Examples:
  • The electricity standing charge plus cost per unit used
  • Sales person’s fixed basic wage plus a commission that varies with sales.

• Total costs = Fixed costs + Variable costs

Revenue

• Revenue: income received from the sale of a product.

• Total revenue: total income from the sale of all units of the product = Quantity x Price.

• Revenue stream: income that an organization gets from a particular activity.