Unit 3.2 - Costs and Revenues Flashcards
Average cost
Refers to the cost per unit of output. It is calculated by using the formula
AC = TC = Q where TC is total cost and Q is quantity (or output level)
Average revenue (AR)
Refers to the value of sales received from customers per unit of a good or service sold. It is calculated by using the formula
AR = TR= Q=P, where TR is total revenue. It is essentially the same as the average price
Cost
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
- 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
Dividends
A share of the net profit distributed to shareholders at the end of the tax year
Fixed costs
- Costs that don’t 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 (/overheads)
Costs that don’t directly link to the production or sale of a specific product
(e.g. rent, wages of cleaning staff, and lighting)
Price
The amount of money a product is sold for, i.e. the sum paid by the customer
Revenue
- 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
Revenue stream
The money coming into a business from its various business activities
(e.g. sponsorship deals, merchandise, membership fees and royalties)
Running costs
The ongoing costs of operating the business
e.g. wages and salaries, insurance premiums, and the cost of purchasing stocks
Semi-variable costs
Have an element of both fixed costs and variable costs
e.g. power and electricity or salaried staff who also earn commission
Set-up costs
The items of expenditure needed to start a business
(e.g. obtaining premises, purchase of machinery and equipment, and deposits to utilities companies (gas, water, electricity and telephone))
Total costs
The sum of all variable costs and all fixed costs of production
Total revenue
- The sum of all revenue streams for a business
- It is calculated by multiplying the price of a product with the quantity sold
Variable costs
Costs of production that change in proportion to the level of output
(e.g. raw materials and piece-rate earnings of production workers)
