Business Management 3.2 – COSTS AND REVENUES
Costs are used for “profit equation” (calculate profit or loss)
Costs and marketing. To decide and inform pricing decisions
Cost used for comparisons in the past (measure efficiency over time)
Past cost data to set budgets for the future.
Cost variances calculated by comparing cost budgets with actual data
Costs to make decisions of resource use.
Cost assist decision making and business performance
TYPE OF COSTS
Direct costs Indirect costs (overheads)
Identified with Cannot be identified with a unit of production or allocated accurately to a cost
each unit of centre. Classified in:
production 1. Production overheads: factory rent and rates, depreciation of equipment
and allocated and power
to a cost 2. Selling and distribution: warehouse, packing and distribution costs and
centre. Labour salaries of sales staff
and materials 3. Administration: office rent and rates, administrative and executive salaries
4. Finance: interest on loans
Fixed costs Variable costs Semi-variable costs
Do not vary with output in the Vary with output Both fixed and variable cost
short run. Materials for production; element
Rent of premises electricity Persons fix wage plus
commission that varies with
sales
REVENUE – Income received from the sale of a product. Selling price of a product is the revenue
earned from that product.
NO cash in cash flow forecast unless all goods were sold for cash
Total revenue: Quantity x Product price
Revenue streams: income an organisation gets from a particular activity.
PRO CONS
Higher total revenue Needs to be managed and controlled (more
Diversification (to support with one work)
business operation, another one) Business losing focus and being
unsuccessful on its original business activity.
Different accounts are required, so separate
profit centres are required
Business may have revenue streams other than their normal trading activities (renting, interests
on deposits, dividends on shares on another business)
1
Costs are used for “profit equation” (calculate profit or loss)
Costs and marketing. To decide and inform pricing decisions
Cost used for comparisons in the past (measure efficiency over time)
Past cost data to set budgets for the future.
Cost variances calculated by comparing cost budgets with actual data
Costs to make decisions of resource use.
Cost assist decision making and business performance
TYPE OF COSTS
Direct costs Indirect costs (overheads)
Identified with Cannot be identified with a unit of production or allocated accurately to a cost
each unit of centre. Classified in:
production 1. Production overheads: factory rent and rates, depreciation of equipment
and allocated and power
to a cost 2. Selling and distribution: warehouse, packing and distribution costs and
centre. Labour salaries of sales staff
and materials 3. Administration: office rent and rates, administrative and executive salaries
4. Finance: interest on loans
Fixed costs Variable costs Semi-variable costs
Do not vary with output in the Vary with output Both fixed and variable cost
short run. Materials for production; element
Rent of premises electricity Persons fix wage plus
commission that varies with
sales
REVENUE – Income received from the sale of a product. Selling price of a product is the revenue
earned from that product.
NO cash in cash flow forecast unless all goods were sold for cash
Total revenue: Quantity x Product price
Revenue streams: income an organisation gets from a particular activity.
PRO CONS
Higher total revenue Needs to be managed and controlled (more
Diversification (to support with one work)
business operation, another one) Business losing focus and being
unsuccessful on its original business activity.
Different accounts are required, so separate
profit centres are required
Business may have revenue streams other than their normal trading activities (renting, interests
on deposits, dividends on shares on another business)
1
