Notes – Unit 3.

3 Costs and revenues

Costs
Types of costs
 Fixed
 Variable
 Direct
 Indirect/overhead

Price – is the sum paid by the customer to purchase a good/service.

Costs - refers to the expenditures incurred by the business.
Set-up costs – items of expenditure needed to start a business:
Running costs – The ongoing costs of operating the business

Fixed costs
are the costs of production that a business has to pay regardless of how much it produces or sells.
Have to be paid even if there is no output.
Are expenses that are independent of the level of output or sales
Changes is indepently of the level of output

Examples include
 rent on leased premises
 interest payments on bank loans
 advertising expenditure
 market research
 management salaries
 office stationery
 security
 professional accountancy fees.

Variable costs
the costs of production that change in proportion with the level of output or sales.
As output increases, total variable costs (TVC) also increase.
In theory, if there is no production then the value of variable costs should be zero.

Examples include
 raw material
 commission earned by sales staff
 hourly wages of production workers
 packaging costs directly associated with output.

Total costs
The sum of fixed and variable cost.
TC = TVC + TFC

Please note:
The terms fixed costs and variable costs, as used in break-even analysis (see Chapter 39), are used
when referring to the sale or production of just a single type of product.
Direct costs
Direct costs are the expenses a business incurs that can be directly tied to the production of a good
or the provision of a service.
Direct costs include mostly variable cost but can also include fixed costs.

Direct Fixed Costs

Costs directly related to the manufacture of such Product, including fx:
 the cost of facilities (rent)
 utilities
 insurance
 equipment depreciation
 royalties payable to others
 allocable manufacturing administration.

Direct Variable Costs

Resources and supplies directly consumed in the manufacture of such Product/service, including
fx:
 the cost of labor
 raw materials.
 Direct labors

Example Direct costs

A production facility making only one type of products

Fixed costs Variable costs

Depreciation of machinery and equipment Raw materials
Electricity (light, water, gas etc) for the whole Packaging per product
buiding Wages

Indirect costs/overheads
Can not clearly be traced to the production or sales of a specific good, service, project.
Are often fixed costs

Fx. electricity for the manufacturing plant.

Although some electricity expense can be tied to the facility, it can't be directly tied to a specific
unit and is, therefore, classified as indirect.

Examples include
 Rent
 Lighting costs
 Electricity, water, gas (can be variable – the more the production facilities run, the higher
consumption)
 Advertising
 Legal expenses
 Salaries for administrative staff
  Insurance premiums
 Security
 Office stationery
 Shipping and postage costs
 Accounting fees

Do question – upload on elevfeedback

 16.1 page 240 and
 16.2 page 241

Please note that Direct costs and indirect costs are used when
referring to businesses that produce or sell a range of products and therefore operate ‘cost centres’
and ‘profit centres’ (see Chapter 22). These costs can be either fixed or variable costs, depending on
the nature of the business.
Revenues
Revenue/Total revenue
Refers to the money coming into a business, usually from the sale of goods and/or services.

Sales revenue = Price × Quantity sold

Profit
A business earns profit if there is a positive
difference between its revenues and costs.

Do question
 16.3 page 242
 16.4 page 243

Revenue streams
Money can come into a business from other means than sales of goods/services,
collectively known as revenue streams.

Examples of various revenue streams

 Advertising revenues
 Transactions fees (at card paying, when ordering/returning etc.
 Franchise costs & royalties
 Sponsorship revenue
 Subscription fees (fitness clubs, streaming )
 Merchandise
 Interest earnings
 Dividends (from shares in other companies)
 Donations
 Subventions (subsidies offered from the government to certain businesses)

Do question
 16.5 page 244
Cost, revenues and the key concepts
Which ethical issues could be related to costs & revenues?
- Hirering or dismissing people
- Pricing strategies

How can a business be creative in

- Managing costs
- Creating revenues

How can changes in internal and external factors impact on

- Revenues
- Costs

How can changes in costs/cost structure affect different funktions in a business?

How can focus on sustainability in a business have impact on

- Revenues
- Costs

How can cost cutting be sustainable (= long lasting)?