IB Business and
Management
3.2 – Costs and Revenues
LEARNING OUTCOMES
• Define, explain and give examples of each
different type of cost (AO2):
– Fixed
– Variable
– Semi-variable
– Direct
– Indirect/Overheads
• Total Revenue and revenue streams, using
examples (AO2)
COST CLASSIFICATIONS
Why are costs important?
 If businesses do not keep a record of
costs then they will be unable to take
effective and profitable decisions.
 Keeping cost records allow comparisons
to be made with past periods of time.
 Past cost data can help to set budgets for
the future.
Costs we need to know about…
–
–
–
–
–
Fixed
Variable
Semi-variable
Direct
Indirect
In Pairs……
Can you define each of these? (Imagine you
are writing a 2 mark definition answer)
Fixed Costs
A Fixed Cost is a cost which does not change as the level
of output changes in the short run.
What are some examples?
What will fixed costs look like on a graph
What will happen to the Fixed Cost per unit as output increases?
Costs
Costs are constant (the same)
at all levels of production
Output
Variable Costs
A Variable Cost is a cost which tends to change directly as
the level of output changes
What are some examples?
What will fixed costs look like on a graph
What will happen to the Fixed Cost per unit as output
increases
Costs
Variable
Costs
$1500
$1000
400
600
Output
Semi-variable Costs
Costs with both a fixed and a variable element.
Often the cost is fixed up to a certain level of output
and then becomes variable after that level is exceeded
Examples?
-Telephone Bill
-Electricity Bills
-Some Labour costs
Can you explain why these costs are semi-variable?
Direct Costs
A direct cost is a cost that can be completely
attributed to the production of specific goods or
services. Direct costs refer to materials, labor and
expenses related to the production of a product.
What would be the direct costs of producing a big
mac?
Indirect Costs
Indirect Costs are costs which cannot be accurately
attributed to specific cost objects. They typically
benefit multiple cost objects and it is not possible to
accurately trace them to individual products, activities
or departments.
Indirect costs are often referred to as overheads or
expenses
Task
The following costs are incurred by a factory on the production of
cupboards:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Laborers' wages
Synthetic wood
Power consumption
Glass
Nails and screws
Factory insurance
Handles, locks and hinges
Wood
Supervisors' salaries
Factory depreciation
Varnish, glue, paints
Factory manager's salary
TYPICAL OVERHEADS
Production
Overheads
Factory rent,
rates, power,
depreciation
of
equipment.
Administrative
Overheads
Office rent
and rates,
clerical and
executive
salaries
Selling and
Distribution
Overheads
Warehouse,
salaries of
sales staff
Finance
Overheads
Interest on
bank loans
and
debentures
Identify the costs…..
Fixed Costs
Variable Costs
Semi Variable Costs
Direct Costs
Indirect Costs
What is meant by revenue?
REVENUE
Revenue
Revenue or turnover is income that
a company receives from its normal
business activities, usually from the sale
of goods and services to customers.
So what types of
income does
revenue NOT
include?
Calculating Revenue
Revenue =
Selling Price
X
Quantity
Revenue Streams
• A revenue stream is a
form of revenue.
Revenue streams refer
specifically to the
individual methods by
which money comes
into a company
What are the revenue streams?
Increasing Revenue
Revenue = Selling Price x Quantity
• How can Revenue be increased??
• Increasing quantity will increase
revenues
• Increasing the price will sometimes
increase revenue
• This depends on the price elasticity of
the product
PROFIT
Calculating Profit
Profit
=
Total Revenue
Total Costs
Question
A gnome manufacturing firm
has the following costs:
Loan Repayments:
Salaries:
Electricity:
Materials:
Packaging:
£100 per month
£2000 per month
£150 per month
£5 per unit
£1 per unit
The Gnomes sell for £15
What would their monthly profit be if they
make and sell 500 gnomes?
What would the monthly profit be if they
make and sell 1,000 gnomes?
Profit = Revenue – Total Costs
•
•
•
•
How can profit be increased??
Profit can be increased by:
Increasing Revenues
Reducing Costs
• If costs are reduced this must be done in a
way that does not affect the quality of the
product or consumer demand