Cost and Revenues

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Costs and Revenues

What is cost?
If you go to a store and like an item and you want to buy it, which of the following questions would you ask: What’s the price of …..? 0R How much does …. cost?

Examples of costs – set-up

Examples of costs - running

Fixed Costs

5000

What happened to the fixed costs if for some reason the company had technical problems and was unable to produce for 2 weeks?

What happens if the landlord decided to raise the rent due to high property prices in the economy?

Variable Costs
> Production, > Costs

Total Costs

Semi-variable costs
They contain an element of both fixed and variable costs. Only tend to change when production or sales exceed certain level of output. Some examples could be a mobile telephone bill, paying overtime to employees and commissions to the salesforce.

Direct Costs
They also change with output level. It is specifically related to a particular project or output of a single product; without that particular project or product, the costs would not be incurred by the business. For example, the cost of meat in a hamburger can be attributed directly to the cost of manufacturing that product, as could the cost of packaging materials and preservatives.  If a company produces artisan furniture, the cost of the wood and the cost of the craftsperson are direct costs—they are clearly traceable to the production department and to each item produced—no allocation was needed. On the other hand, the rent of the building that houses the production area, warehouse, and office is not a direct cost of either the production department or the items produced.

Indirect Costs (overheads)
A.k.a facilities and administrative costs (F&A), cannot be clearly related to the level of output of any single product, i.e. they are not directly linked with the level of production ot sale of a product. For example, the costs of fuel and power can’t be associated with the level of production but may not be directly linked to a particular product but apply to several or all different areas of the business. Other examples of overheads might include: rent, advertising, legal expenses, insurance, shipping and posting costs. Most indirect costs could also be considered fixed costs since they don’t directly relate to output level.

Question
Classify the fllowing costs for a mainstream airline company as fixed or varible cost: Advertising and promotions Airport charges Fuel Meals and drinks onboard Remuneration of administrative staff Remuneration of flight attendants –

With reference to the airline industry, , distinguish between direct and indirect costs.

Average Costs
It’s calculated by dividing total costs by the level of output. For instance, if total costs of producing 1000 t-shirts amounts to $8000, the cost of each t-shirt averages at $8. AFC and AVC

Revenues
Proceeds coming into a business, usually from the sale of goods and/or services. Revenues that come from the sal of a firm’s product is called sales revenue or sales turnover. Revenues not only come from the sales of goods/services. Money an come into a firm from other means, depending on the type of firm. Other sources of non-sales revenue for a business include: Subventions Grants Donations Fund-raising Sponsorship Interest Dividends Sale of assets

Contribution
It’s the amount of money that remains after all diet and variable costs have been taken away from the revenue of a business. Contribution per unit = P – AVC

Which is the strongest product?

Profit = Total Contribution TFC

Contribution analysis for multiproduct firms
In a multiproduct firm, each product is likely to ontribute something towards the paymnt of fixed and indirect costs. Even if a particular product is loss-making but has a positive contribution, managers will be unlikely to remove it.

Contribution Analysis
It has several uses for a business: Contribution cost pricing: it allows the usiness to identfy the...
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