3.2 Costs and revenues Flashcards
Cost
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.
Direct costs
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.
Fixed costs
Fixed costs are the costs that do not vary with the level of output. They exist even if there is no output, e.g. the cost of rent,
management salaries and interest repayments on bank loans.
Indirect costs (or overheads)
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.
Price
Price refers to the amount of money a product is sold for, i.e.
the sum paid by the customer.
Revenue
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.
The formula for calculating revenue is:
Sales revenue = Price x Quantity sold
Revenue stream
Revenue stream refers to the money coming into a business from its various business activities, e.g. sponsorship deals,
merchandise, membership fees and royalties.
Semi-variable costs
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.
Total costs
Total costs are the sum of all variable costs and all fixed costs of production.
Variable costs
Variable costs are costs of production that change in proportion
to the levelof output, e.g. raw materials and piece-rate earnings
of production workers.
Revenue streams:
Advertising revenue
Companies such as Google, Twitter and Facebook rely heavily on advertising revenue as a revenue stream. For example, over 80% of the
revenues from social media firm Twitter comes from text and display advertising. Google and Facebook offer cost per click (advertisers pay only when customers actual click on the advert) and cost per thousand impressions: (advertisers pay based on the number of times the
adverts are displayed).
Revenue streams:
Transactions fees
Ryanair, for example, charges
customers who pay by American Express credit card €7 ($9.50)and 2%commission. Other budget airlines such as AirAsia and easyjet charge fees for checked baggage and pre-assigned seats. According to the Wall Street Journal, low-cost airlines earn around 20% of their revenue from
these alternative revenue streams
Revenue streams:
Subscription fees
These charges are imposed on
customers who use or access a good or service, based on a formal agreement. For example, fitness and leisure
clubs charge yearly membership fees, many credit card companies charge annual fees, telephone companies
charge a basic service fee on a monthly basis but extra for additional services (such as overseas calls and payper-
call services), as do cable and satellite television providers. Manchester United Football Club has operated
its subscription television channel since 1998.
Revenue streams:
Dividends
Being a shareholder of other companies
entitles a business to payments of any declared dividends. For example, Europe’s largest carmaker Volkswagen holds shares in Porsche, Suzuki, and Scania (the Swedish maker of heavy trucks and buses).
Revenue streams:
Interest earnings
Businesses can earn interest on their
cash deposits at the bank. For highly cash rich businesses this can be an important revenue stream. Forbes reported
that Apple had a total cash balance of $137.1billion in 2013, whilst Microsoft had $68.3billion, Google had 3.2 Costs and revenues .1billion, and pharmaceutical company Pfizer had $46.9billion. Depositing $1billion in a bank account that
pays just 1% interest per year still yields $27397 per day! At an interest rate of 3%, the daily revenue stream would
be $82192!
