1. IB Business and Management
3.2 – Costs and Revenues

2. LEARNING OUTCOMES
Define, explain and give examples of each different type of cost (AO2):
Fixed
Variable
Semi-variable
Direct
Indirect/Overheads
Total Revenue and revenue streams, using examples (AO2)

3. Cost Classifications

4. Why are costs important?
If businesses do not keep a record of costs then they will be unable to take effective and profitable decisions.
Keeping cost records allow comparisons to be made with past periods of time.
Past cost data can help to set budgets for the future.

5. Costs we need to know about…
Fixed
Variable
Semi-variable
Direct
Indirect
In Pairs……
Can you define each of these? (Imagine you are writing a 2 mark definition answer)

6. Fixed Costs
A Fixed Cost is a cost which does not change as the level of output changes in the short run.
What are some examples?
What will fixed costs look like on a graph
What will happen to the Fixed Cost per unit as output increases?
Costs
Costs are constant (the same) at all levels of production
Output

7. Variable Costs
A Variable Cost is a cost which tends to change directly as the level of output changes What are some examples? What will fixed costs look like on a graph What will happen to the Fixed Cost per unit as output increases
Costs
Variable Costs
$1500
$1000
400
600
Output

8. Semi-variable Costs
Costs with both a fixed and a variable element. Often the cost is fixed up to a certain level of output and then becomes variable after that level is exceeded Examples? -Telephone Bill -Electricity Bills -Some Labour costs Can you explain why these costs are semi-variable?

9. Direct Costs
A direct cost is a cost that can be completely attributed to the production of specific goods or services. Direct costs refer to materials, labor and expenses related to the production of a product.
What would be the direct costs of producing a big mac?

10. Indirect Costs
Indirect Costs are costs which cannot be accurately attributed to specific cost objects. They typically benefit multiple cost objects and it is not possible to accurately trace them to individual products, activities or departments.
Indirect costs are often referred to as overheads or expenses

11. Task
The following costs are incurred by a factory on the production of cupboards:
1. Laborers' wages
2. Synthetic wood
3. Power consumption
4. Glass
5. Nails and screws
6. Factory insurance
7. Handles, locks and hinges
8. Wood
9. Supervisors' salaries
10. Factory depreciation
11. Varnish, glue, paints
12. Factory manager's salary

12. Administrative Overheads Selling and Distribution Overheads
TYPICAL OVERHEADS
Administrative Overheads
Selling and Distribution Overheads
Finance Overheads
Production Overheads
Factory rent, rates, power, depreciation of equipment.
Office rent and rates, clerical and executive salaries
Warehouse, salaries of sales staff
Interest on bank loans and debentures

13. Identify the costs….. Fixed Costs Variable Costs Semi Variable Costs Direct Costs Indirect Costs

14. What is meant by revenue?

15. Revenue
Revenue or turnover is income that a company receives from its normal business activities, usually from the sale of goods and services to customers.
So what types of income does revenue NOT include?

16. Revenue = Selling Price X Quantity
Calculating Revenue
Revenue = Selling Price X Quantity

17. Revenue Streams
A revenue stream is a form of revenue. Revenue streams refer specifically to the individual methods by which money comes into a company

18. What are the revenue streams?

19. Increasing Revenue Revenue = Selling Price x Quantity
How can Revenue be increased??
Increasing quantity will increase revenues
Increasing the price will sometimes increase revenue
This depends on the price elasticity of the product

20. Profit

21. Calculating Profit
Profit = Total Revenue - Total Costs

22. Question A gnome manufacturing firm has the following costs:
Loan Repayments: £100 per month
Salaries: £2000 per month
Electricity: £150 per month
Materials: £5 per unit
Packaging: £1 per unit
The Gnomes sell for £15
What would their monthly profit be if they make and sell 500 gnomes?
What would the monthly profit be if they make and sell 1,000 gnomes?

23. Profit = Revenue – Total Costs
How can profit be increased??
Profit can be increased by:
Increasing Revenues
Reducing Costs
If costs are reduced this must be done in a way that does not affect the quality of the product or consumer demand