3.2 Costs and Revenues

Question 1

Cost

Answer 1

Cost refers to the sum of money incurred by a business in the production process, e.g. the costs of raw materials, wages and salaries, insurance, advertising and rent.

Question 2

Direct costs

Answer 2

Direct costs are costs specifically attributed to the production or sale of a particular good or service. Direct costs can be traced back to the product and/or to a cost centre.

Question 3

Fixed Costs

Answer 3

Fixed costs are the costs that do not vary with the level of output. Theyexistevenifthere isno output, e.g. the costofrent, management salaries and interest repayments on bank loans.

Question 4

Indirect costs

Answer 4

Indirect costs (or overheads) are costs that do not directly link to the production or sale of a specific product, e.g. rent, wages of cleaning staff, and lighting.

Question 5

Price

Answer 5

Price refers to the amount of money a product is sold for, i.e. the sum paid by the customer.

Question 6

Revenue

Answer 6

Revenue is the money that a business collects from the sale of its goods and services. It is calculated by multiplying the unit price of each product by the quantity sold.
TR = P X Q
AR = TR/Q = P

Question 7

Revenue Stream

Answer 7

Revenue stream refers to the money coming into a business from its various business activities, e.g. sponsorship deals, merchandise, membership fees and royalties.

Question 8

Semi-variable costs

Answer 8

Semi-variable costs are those that have an element of both fixed costs and variable costs, e.g. power and electricity or salaried staff who also earn commission.

Question 9

Total costs

Answer 9

Total costs are the sum of all variable costs and all fixed costs of production
TC = TVC + TFC
TVC = AVC X Q
TFC= AFC X Q

Question 10

Variable costs

Answer 10

Variable costs are costs of production that change in proportion to the level of output, e.g. raw materials and piece-rate earnings of production workers.