Revenues and Costs
Revenues and Costs
Understanding Revenues
- Revenues are the money received by a business during a specific period from selling a product or providing a service.
- Total Revenue can be calculated using the formula Quantity of Goods Sold x Selling Price.
- Regular Revenue is the income generated from the sale of standard goods or services, while Non-Regular Revenue is generated from non-standard activities.
- The main goal of a business is to maximise revenue by increasing sales volume or increasing selling price. However, high prices could steer customers towards competitors.
Understanding Costs
- Costs are all the money that a business spends when producing goods or providing services.
- Fixed Costs are those that do not change with the level of output or sales, such as rent or salaries.
- Variable Costs change with the level of output or sales, such as raw materials or direct labour.
- Semi-variable Costs are partly fixed costs and partly variable costs - for example, a mobile phone bill might have a fixed subscription and then additional costs per call.
- Direct Costs are those that can be attributed directly to producing a specific item, like the cost of raw materials.
- Indirect Costs (also known as overheads) are general costs that keep the business running, like utility bills. These cannot be attributed to one specific product.
- Businesses aim to minimise costs to increase profitability, but cutting costs may impact on the quality of the product produced.
Profit and Break-Even
- Profit is the total revenue of the business minus its total costs. If the revenue is higher than the cost, the business has made a profit. If the cost is higher than the revenue, the business makes a loss.
- Break-Even Point is the point where total revenues equal total costs - the business is just covering its costs and not making a profit or loss. Businesses can calculate this to ascertain how many units they need to sell to cover costs and start making a profit.
- The contribution per unit is the selling price of a product minus the variable cost per unit. This figure tells you how much each unit sold contributes towards covering fixed costs.