<3.3 COSTS & REVENUE>

--COST CLASSIFICATIONS--

--INTRODUCTION--

This is a very important lesson as these classifications are used throught this unit and unit 5 so remain focused!!!!

When you buy a coffee at starbucks what is the cost of

--FIXED vs VARIABLE COSTS--

--FIXED--

FIXED COSTS refer to COSTS THAT REMAIN UNCHANGED/DO NOT VARY when OUTPUT CHANGES.
In other words, If the firm produces zero output it STILL has to pay this cost.
Common examples include FACTORY RENT, INSURANCE, SUPERVISOR SALARIES....

--VARIABLE--

VARIABLE COSTS refer to COSTS THAT CHANGE, when OUTPUT CHANGES.
In other words, If the firm produces zero output it DOESN'T HAVE to pay this cost.
Common examples include, RAW MATERIALS, WAGES, ELECTRICITY USAGE....

--TASK--

Create a two column table with 5 examples of fixed costs in the left column and 5 examples of variable costs in the right column @Your school, in this case output refers the number of students we teach.

--TASK--

Quickly sketch a diagram with 'Quantity (Q)' on the x-axis and 'Cost ($)' on the y-axis, then sketch the variable cost and fixed cost curve, explaining their shape.

--P. P. TASK--

Using Table 2, calculate the following forecasted figures for 2018:
total variable costs:
2017: $6 * 75,000 = $450,000
2018: 75,000 + 10% = 82,500, ($6 + $1.00) $7 * 82,500 = $577,500

--DIRECT vs INDIRECT COSTS--

--DIRECT--

DIRECT COSTS refer to those costs that can be TRACED SPECIFICALLY to the production of a unit of output and can be measured DIRECTLY.
In other words, these costs wouldn't exist without producing the unit.
Common examples include RAW MATERIALS, DIRECT LABOUR etc...
⚠️Most direct costs are VARIABLE in nature as they change when output changes, however some are in fact FIXED in nature, for example if a product requires a dedicated machine, which is leased on a fixed fee, the despite it being a direct cost to that product it is still fixed.

--INDIRECT--

INDIRECT COSTS (also commonly known as 'OVERHEADS') refer to costs that can't easily be traced back to a single unit of output and instead have to be 'INDIRECTLY ALLOCATED' to the unit by getting the total and dividing it by the quantity.
Common examples include RENT OF PREMISES, SALARY OF THE MANAGER, , INSURANCE etc...
In other words, these costs would still exist without producing the unit.
Most indirect costs are 'FIXED' in nature as they do not change as with output.
⚠️Most indirect costs are FIXED in nature as they DO NOT CHANGE when output changes, however some are in fact VARIABLE in nature, for example ELECTRICITY is hard to attribute to one good, and is also variable in nature, as well as any maintenance fees etc..

--EXAMPLE--

"Let's use a Starbucks coffee as our example!"

DIRECT/VARIABLE COSTS

Coffee beans per drink
Milk per drink
Cup, lid, sleeve per drink
Syrup per drink
Barista labour per drink

DIRECT/FIXED COSTS

Lease of coffee machine
Training costs of Baristas

--EXAMPLE--

"Let's use a Starbucks coffee as our example!"

INDIRECT/FIXED COSTS (These are basically not 'per cup')

Rent of store
Store manager's salary
Insurance
Internet service
Interest on loans
Etc...

INDIRECT/VARIABLE COSTS

Electricity
Water usage
Cleaning supplies
Coffee machine maintenance

--TO SEE HOW THESE ARE CALCULATED GO HERE--

--TASK--

Identify a minimum of two costs per category that your school pays. Assume that the product we produce are the one hour lessons.

--REVENUES--

--TOTAL--

TOTAL REVENUE can be calculated by multiplying the quantity of products sold by the selling price. (Price * Quantity)

--REVENUE STREAMS--

--DEFINITION--

REVENUE STREAMS refer to the SOURCES OF INCOME/REVENUE that a particularly company has access to. There can of course be just a single stream or multiple types.

--BENEFITS--

The BENEFITS of having more than one source of income include:

it should lead to HIGHER TOTAL REVENUE for the business
it is a WAY TO SPREAD RISK BY DIVERSIFICATION, as other income sources can be used to cover losses of income in other streams..

Businesses may receive income from revenue streams other than their normal operating or trading activities, for example from:

rent from factory or space that is rented to another business
dividends on shares held in another business
interest on deposits held in a bank.

--DRAWBACKS--

The DRAWBACKS to developing a range of income generating activities include:

Each activity needs to be managed and controlled and this makes MORE WORK – and this could be a significant drawback for an entrepreneur or sole trader.
A large number of activities can result in a BUSINESS LOSING FOCUS and being less likely to make a success of its central and original business activity.

--TASK--

Imagine you are the TES Business Development Officer and you have been asked by the CEO to explain your thinking with regards to revenue streams at TES.
"As you know our core business is providing educational services as such our main revenue stream comes from..., however we also have the following sources of revenue....this is great as...., however we don't want to..."

Page updated

Google Sites

Report abuse