3.3 - cost and revenue Flashcards
define costs
total expenditure a business incurs in order to run its operations. Costs are NOT price! Costs refer to the cost of production and price refers to the amount the product is sold for.
define revenue
(also known as sales revenue)it refers to the amount of money a business generates from the sale of goods and services
equation for revenue
TR=PQ
P - price per units
Q - quantity
P=TR/Q
AR=TR /Q
AR=P
define profit
it is the difference between revenue and cost (obviously , a higher Revenue and a lower cost will generate a bigger profit):
formula for profit
Pr=TR-TC
define fixed costs
the costs of production a firm has to pay regardless of how much it produces or sells. They remain fixed in the short run (where at least one factor of production does not change).
give 3 examples of fixed costs
Examples of Fixed costs are: rent, insurance, interest on loans. A firm has to pay these costs regardless of the production.
what factor effects fixed costs
Fixed cost can change, but independently on the level of production (output). For example, a landlord might increase the rent or managers being paid a higher salary.
explain variable costs
the costs of production that change in proportion with the level of production (output)or sales. Meaning that if the level of output or sales double the variable costs will also double (i.e. raw material costs will increase if a textile firm makes more curtains). They can be incurred in the short or the long run (where all factors of production are variable).
what effects variable costs
Variable costs are pegged with the quantity produced; if there is no production the firm won’t incur in variable costs.
give 3 examples of variable
sales commissions, packaging costs, energy usages costs
what are total costs
the sum of fixed costs (FC) plus the variable costs (VC)
equation for total costs
TC=FC+VC
equations for average fixed costs (AFC)
AFC=FC/Q
Q - quantity produced
FC - Fixed costs
equation for average variable costs (AVC)
AVC=VC/Q
Q= quantity produced
VC=variable costs
explain direct costs
these are costs that can be identified with the production of specific goods and services and therefore can be easily traced and assigned to a particular department or process (known as cost centres). Unlike, Variable costs direct costs are not necessary related to the level of production.
example of direct costs
the cost of meat for a burger fast food restaurant, the cost flour for a bakery or the cost of workers in a factory.
indirect costs
these are costs that are not clearly identified with the production of specific goods and services and hence are very difficult to trace to a product activity, sale or department. Therefore, they are difficult to assign to a specific cost centre.
4 examples of indirect costs
stationary, insurance, utility bills, legal expenses
whats the difference between fixed costs and indirect costs
Indirect costs can be considered Fixed costs. However, the main difference is that they are not easily identified with a particular activity
where can total revenue be obtained from
Total Revue is also know as Sales Revenue or Turnover and includes ALL income received , whether the sales are cash or credit. Moreover, a firms Revenue can also be obtained by other sources of income.
what are 2 sources of income total revenue
- Rental Income – in case the firm has another property that generates an income. Also, some firms can rent their spaces in different seasons
- Sale of fixed assets – sell of unused or unutilized assets (i.e. machinery, old computers, furniture, stationary etc.)
define dividends
when a firm is a shareholder in another business and receives the dividends.
define interest on deposits
when a firm has money deposited in the bank and receives and interest (business can hold a substantial amount of money that generates high interest rates.
define donations
a gift given by an individual or an organization (normally targeted to charitable organizations)
define subsidies
financial assistance granted to support a firm that are in the public interest
explain advertising revenues with an example
this is becoming more common nowadays since Facebook, Google and Twitter; for example; use this revenue. Over 80% of the revenues from twitter come from “text and display” advertising; Facebook and Google offer costs “per click” (advertisers pay when customers “click” on the advert) or for “thousand impressions” (advertisers pay based on the number of times their advert is displayed)
define merchandise
some firms rely heavily on merchandise revenue in addition to admission charges (i.e. cinemas, theme parks, music concerts, etc.)
