Cost and Revenue. Unit 3.3

Costs and Revenues Notes

Types of Costs

• Definition: Charges incurred by an organization.

Examples of Business Costs:

• Raw materials and components.

• Inventory from suppliers.

• Rent or mortgage payments.

• Insurance payments.

• Salaries and wages.

• Utility bills.

1. Fixed Costs

• Definition: Costs that don’t change with output.

• Examples: Rent, insurance premiums, machinery leasing, management salaries.

2. Variable Costs

• Definition: Costs that vary with output.

• Examples: Raw materials, sales commission, production wages.

Total Cost of Production

• Formula: TC = TFC + TVC.

Average Costs

• Definition: Cost per unit of output.

• Formula: AC = TC ÷ Q.

3. Direct Costs

• Definition: Costs directly linked to goods/services.

• Types: Variable and fixed costs associated with production.

4. Indirect (Overhead) Costs

• Definition: Costs not easily linked to specific outputs.

• Examples: Rent, administrative salaries, utility bills.

Total Revenue & Revenue Streams

• Revenue: Money from sales.

• Revenue Streams: Different sources like fees, royalties, merchandise, etc.

Total Revenue (TR)

• Formula: TR = P × Q.

• Example: 100 plots at $45 each = $4500.

Average Revenue (AR)

• Definition: Revenue per unit sold.

• Relationship: AR = TR ÷ Q = Price per unit.

Revenue vs. Profit

• Profit Formula: Profit = Total Revenue – Total Costs.