Accounting & Finance 3.2 ~ COSTS & REVENUES FRIDAY, JUNE 10, 2016 PAGES

Terms to Know Price = what a customer pays for an item Cost = The business expenditure in producing the item to be sold. Revenue = money from products sold. Profit = Revenue – Cost

Exam Tip! Page 230 Price and cost are not interchangeable!

Types of Costs 1.Fixed = costs of production that a business has to pay regardless of how much it produces or sells. Must be met even if there is no output Can change, but independent of the level of output. Figure 3.2a, page 231 Examples ◦Rent ◦Interest on a loan ◦Advertising ◦Salaried employees

Types of Costs 2.Variable = costs of production that change in direct proportion to the level of output or sales. If the level of output doubles, variable expenses would double. If there were no production there would be no variable expenses (in theory). Figure 3.2b, page 231 Examples: ◦Raw materials ◦Commissions ◦Packaging costs

Types of Costs 3.Total Variable + Fixed = total costs See figure 3.2c on page 231

Common Mistake Review key terms and do not write “circular answers” that repeat the question.

Types of Costs 4.Semi-variable = contain an element of both fixed and variable. Change when production or sales exceed a certain level of output. Examples: ◦Cell phone bill ◦Salaried employee who also gets overtime

Types of Costs 5.Direct Costs = similar to variable in that they change with the level of output. However, it is specifically related to a particular project or the output of a single product. Example: airline food that is included in the price of a ticket is a variable cost, but on a flight where it is not included in the ticket it is a direct cost (passengers purchase the food if they desire it). See example on page 232

Types of Costs 6.Indirect costs = overheads – cannot be clearly related to the level of output of any single product. Example: fuel and power are associated with level of production, but not directly linked.

Exam Tip! Page 232 Fixed and variable costs are used when referring to the sale/production of one product. Indirect and direct costs are used when referring to an organization that sells/produces a range of products.

Box 3.2a Costs Formula Memorize these!

Revenue Refers to proceeds coming into a business, usually from the sale of goods/services. ◦Also called: sales revenue or sales turnover if it is indeed from the sale of the company’s products.

Box 3.2b Revenue Formula Memorize these!

Revenue Streams Advertising Revenue – selling ad space (online, in magazines, etc) Transaction Fees Franchise costs & royalties Sponsorship – such as when Visa sponsors the Olympics. Subscription fees

Revenue Streams Merchandise (for entertainment) Dividends – earned on stock shares owned. Donations Interest – from cash holdings in a bank. Subventions = subsidies offered (from the government) to lower costs. (farmers, hospital, schools receive them)

CUEGIS Profits can be increased by: ◦Increasing sales (80%) ◦Decreasing costs (20%)

CUEGIS Consider how the concepts of change, culture, ethics, globalization, innovation and strategy apply across the content discussed in this unit on business costs and revenues.