Accounts & Finance

1

Costs & RevenuesPages 230 - 237

2Topic 3.2

(SL)

3

Better go home and make a net than dive for fish at random.

Chinese Proverb

4

Assessment Objectives:AO1Demonstrate knowledge and understanding

AO2Demonstrate application and analysis

AO3Demonstrate synthesis and evaluation

AO4Demonstrate a variety of appropriate skills

5

Content Objectives:

AO2:To apply and analyse • the various types of costs using

examples – fixed costs, variable costs, semi-variable costs, direct costs, indirect/overheads

• Total revenue and revenue streams using examples

6

Language Objectives:LO1Reading informative texts: determine two or more central ideas of a given case study LO2Writing: write arguments to support claims using evidence from a case studyLO3Listening: build on others’ ideas and participate in discussions.LO4Speaking: make strategic use of digital media textual and other interactive elements in presentations.

https://www.youtube.com/watch?v=hc9UpmtpLUk

refers to the expenditure in producing an item (paid by producer) whereas price refers to the amount the item is sold for (paid by customer).

7

Types of costs (AO2)

Fixed Costs ( 固定成本 ) Fixed costs are the costs of production that

a business has to pay regardless of its output i.e. even when output = zero

Examples: rental, interest payments on bank loans, advertising, market research, managers' salaries, stationery, accountancy fees etc

FC can change but it's independent of output.

See TB p231 for graph

8

Variable Costs ( 可变成本 ) Costs of production that change in direct

proportion to the level of output If level of output = zero, there will be no

variable costs.

Total costs = Total FC + Total VC

Examples: raw materials, commission, product packaging

Refer to TB p231 for graph

Note: TC line starts at the same point as FC.

9

Semi Variable Costs Contain an element of both FC & VC Change only when production exceed a

certain level of output

More realistic approach in business context

Examples: mobile phone bills has a minimum monthly component and a variable component; overtime pay for hourly-rated staff; sales staff earns a minimum monthly salary plus commission based on units sold.

10

Direct Costs ( 直接成本 ) DC is related to a single product or project

i.e. if that product line or project is withdrawn, DC = zero.

Include VC such as raw materials.

Catering costs for non-budget airlines e.g. EVA air is classified as VC since all passengers onboard are entitled to the food and drinks

Catering costs for budget air e.g. Airasia is DC since passengers have to pay for their food and drinks separately, not included in airfare.11

Direct Costs DC is related to a single product or project

i.e. if that product line or project is withdrawn, DC = zero.

Include VC such as raw materials.

Catering costs for non-budget airlines e.g. EVA air is classified as VC since all passengers onboard are entitled to the food and drinks

Catering costs for budget air e.g. Airasia is DC since passengers have to pay for their food and drinks separately, not included in airfare.12

Costs formulae (Box 3.2a) Total cost (TC) TC = TFC + TVC

Total variable costs (TVC) TVC = AVC X Q

Total fixed costs (TFC) TFC = AFC X Q

Notes:

Average costs = AFC + AVC

AFC = TFC divide by level of output (Q)

AVC = TVC divide by level of output (Q)

AC can be reduced by engaging in larger scale of production

Reason: TFC is constant but is spread over an increasing Q!

13

Revenue refers to the money coming into a business, usually from the sale of goods and/or services (known as sales revenue).

Formula: Sales revenue = Price X Quantity sold

Total Revenue: TR = P (Price) X Q (Qty sold)

Average Revenue: AR = TR/Q

Since Price: P = TR/Q so AR = Price

https://www.youtube.com/watch?v=iuoEbzeS4Ug (revenue and profit)14

Revenue (AO2)

Revenue streams ( 收入来源 ) Revenue: comes from the sale of goods and

services.

Revenue streams: money that come from other means.

Examples are given in the following slides

15

Revenue streams Advertising revenue: Google, Twitter,

Facebook rely heavily on advertising revenue as a revenue stream i.e. advertisers pay based on cost per click or number of times the advert is displayed

Transaction fees: Low cost airlines tend to charge customers a commission when customers pay their bookings via credit card transactions.

Franchise costs and royalties: Franchisees pay a fee to their franchisor to purchase the right to use its brand name, logos and trademarks.

16

Revenue streams Subscription fees ( 申购费 ): charges imposed

on customers who use a good or service based on a formal agreement. Example: Fitness, Golf club membership

Merchandise: service providers in the entertainment industry sells food, beverage, limited edition souvenirs etc

Subventions ( 资 助 ): subsidies offered to certain businesses to help reduce costs of production e.g. schools & hospitals

Other forms include sponsorship revenue, dividends, donations and interest earnings17

Cost control ( 成本控制 ) measures such as cost cutting to remain competitive

Cost cutting ( 削减成本 ) is justifiable if it leads to improved efficiency and profitability i.e. ethical considerations in cost cutting strategies

18

Costs, Revenues & CUEGIS