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.