3.2 Costs and Revenues Topic 3: Finance and Accounts

Management Decisions and Cost Business decisions cannot be made without cost information. Why?  Profit or loss cannot be calculated without knowing COST  Marketing will use COST information to determine pricing  COST records are useful in comparing to past performance and help set budgets  COST data can help determine the use of resources…use labor hours or buy automated equipment?

Types of Costs The financial costs incurred in making a product or providing a service can be classified into categories:  Direct Costs (these costs are clearly identified with a unit of production and can be allocated to a cost center)  Indirect / Overhead Costs  Fixed Costs  Variable Costs  Semi-Variable Costs

Direct Costs  Costs can be clearly identified with each unit of production and can be allocated to a cost center. Direct costs of a hamburger in a fast-food restaurant is the cost of meat…. You name another Direct cost for a automobile repair shop servicing a car is the labor of the mechanic…You name another  Common direct costs in manufacturing are labor and materials.  Common direct costs in a service business is the cost of goods sold.

Indirect Costs  Costs which cannot be identified with a unit of production – also known as overhead costs Indirect cost to a farm is the purchase of a tractor…. You name another Indirect cost to a automobile repair shop is rent… You name another Indirect cost of running a school is the cost of cleaning… You name another

Indirect Costs Indirect Costs can be classified into 4 groups: 1.Production overheads – factory rent, equipment depreciation, electricity 2.Selling and distribution overheads – warehouse, packing, and distribution costs 3.Administration overheads – office rent, clerical salaries 4.Finance overheads – interest on loans

Costs are affected by Output Some costs vary with output of production and some costs do not change. Costs can be classified:  Fixed costs – These remain constant no matter what happens to production output (rent)  Variable costs – These vary as production output changes (quantity of raw materials used if nothing is produced, variable cost is 0)  Semi-Variable costs – These include both fixed and variable costs (account charge for electricity plus the electricity used)

Revenue Revenue is the income received from the sale of a product Revenue is NOT CASH!! Total Revenue is the total income from the sale of ALL units of the product (quantity X price) Revenue Stream a range of trading activities that results in income.

Revenue Streams for Apple, Inc. Apple TV Mac iPhone iPad iWatch Accessories

Revenue Streams Benefits:  Can lead to overall higher revenue  Provides diversification of income Drawbacks:  Each stream needs to be managed and monitored  The business can lose focus on primary purpose  Separate accounts are needed for management creating needed for sophisticated software Non-traditional revenue streams: rental income, dividends from investments, interest from deposits held in banks

Don’t confuse Revenue, Cash, and Profit Remember: Revenue is not the same as cash received from sales.  Revenue is recorded at the time of sale not at the time cash is received. Remember: Revenue is not the same as profit.  All costs of operating the business are subtracted from revenue to determine profit.