3.2 Cost and revenue

Question 1

Types of costs

Answer 1

• fixed costs (FC)
• variable costs (VC)
• semi-variable costs (SVC)
• direct cost (DC)
• indirect cost (IC)

Question 2

Fixed cost (FC)

Answer 2

These remain unchanged as the output level of firm changes. It does not matter what level of output the firm produces (even zero output), fixed costs remain the same.
Examples of fixed costs:
- rent
- salaries
- insurance
- depreciation

Question 3

Variable cost (VC)

Answer 3

These are costs that vary directly with the level of output, meaning that the total variable cost is totally dependent on the level of output.
Examples of variable costs:
- direct labour
- raw materials
- packaging

Question 4

Semi-variable cost (SVC)

Answer 4

Most costs are not easily classified into either fixed or variable, falling between the two classifications and referred to as semi-variable costs. For example, energy bills have a fixed standing charge and a variable element, depending on usage.

Question 5

Direct costs (DC)

Answer 5

Direct cost is similar to variable cost because it links cost to output. However, a direct cost is directly related to the output level of a particular product/department (cost centre); appropriate for firms making more than product.

Question 6

Indirect costs (IC)

Answer 6

Costs that cannot be linked with the output of any particular product are called overheads. They are related to the level of output of the firm but not directly, e.g.
- utilities like gas
- rent
- general administration
- warehouse fees

Question 7

Total revenue (TR) (formula)

Answer 7

price per unit x quantity sold

Question 8

Profit or loss (formula)

Answer 8

total revenue - total costs

Question 9

Total cost (formula)

Answer 9

fixed cost + total variable cost

Question 10

Revenue streams

Answer 10

• cash sales
• credit sales
• interest
• royalties
• dividends on business investments