Cost and Revenue

4 Key excerpts on "Cost and Revenue"

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  eBook - ePub

  Entrepreneurial Finance

  Fundamentals of Financial Planning and Management for Small Business

  • M. J. Alhabeeb(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 8

  PROFIT AND THE COST–VOLUME ANALYSIS

  8.1 Profit Concept Between Economics and Accounting

  There is no doubt that “profit” is the most common and widely used term in the business world. However, the commonality and popularity of the term does not necessarily make it a clear concept with an unequivocal connotation. When the classical economics specified the four major factors of production as land, labor, capital, and entrepreneurial management, it also specified the payments these factors get for their individual contribution in the production process. These payments are respectively: rent, wages, interest, and profit. From here we can conclude that profit is the monetary return to those who initiate and manage the entrepreneurial function of production. If the first three payments (rent, wages, and interests) are made out of the product's sale revenue, the residual, if any, would constitute the fourth payment to the entrepreneur or owner as profit. It is in this sense we get the equality between profit and the net revenue since what we call profit is in fact the surplus over and above the costs of production. These costs may also include taxes, financing cost, and the like. Technically, profit would equal the difference between the total cost of production (TC) and the total revenue brought by the sale of products (TR).

  It is worthwhile to note here that while the term total revenue is a clear and well-defined concept, the total cost is less clear. Total revenue is the dollar value of the product sold, which is obtained by multiplying the quantity of the units of products sold by the market price per unit. Total cost could include only the explicit cost or the outlay such as the expenditures on the factor of production mentioned earlier and other direct payments such as taxes and interests on loans. If the total cost includes only the explicit cost (EC), the calculated profit would be considered as business or accountant's profit (πa

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  Available until 25 Jan |Learn more

  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  This chapter introduces you to some simple techniques for analysing the costs and revenues of a business. The approaches employed are based on a combination of approaches used in business and economic analysis with a focus on relevance to real world business decision making. The chapter shows you how to calculate and record different types of costs and revenues incurred and received by businesses. You are shown how to measure and illustrate different types of costs and revenues and methods that can be used to identify break-even, loss making and profit making positions for a business.

  4.2  The nature of cost–volume–profit analysis A business model

  All businesses will receive revenues from selling products. They will incur costs in making and providing these products. The relationship between costs and revenues can be illustrated by taking the example of the giant multinational company BIC. BIC is a company that is able to benefit from what economists refer to as economies of scale. Economies of scale are the cost savings per unit of production that a large firm is able to achieve from producing on a very large scale. For example, BIC is able to spread its marketing costs across billions of units of product that are sold across the globe.

  Key Term

  Business model – a description of the operations of a business, including its plans to increase revenues and control costs.

  For example, BIC is an international business that focuses on producing biros, razors and cigarette lighters among other products. Its core lines are functional in meeting customer needs for standard useful items at value for money prices. BIC’s business model includes maximizing revenues by providing useful goods at attractive prices, and in controlling its costs through efficient operations including exploitation of economies of scale. These economies of scale include mass production and distribution.

  The relationship between revenues and costs determines the profit that a business makes. Key Term

  Revenue – the receipt from selling a good or service.

  There are a number of different ways of measuring revenue which are explored later in this chapter. In the context of this chapter cost will be defined as the money outlay to produce, and/or sell a good. The relationship between costs and revenues can be introduced by the application of cost–volume–profit analysis.

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  eBook - ePub

  Accounting 101

  From Calculating Revenues and Profits to Determining Assets and Liabilities, an Essential Guide to Accounting Basics

  • Michele Cagan(Author)
  • 2017(Publication Date)
  • Adams Media

    (Publisher)

  Chapter 5

  Revenues, Costs, and Expenses

  New and small business owners tend to track their profit-related accounts very closely. There’s a good reason for this: Without pretty consistent profits, no business can survive for the long haul. Three numbers go into figuring out profits: revenues, costs, and expenses. Every business has revenues (hopefully) and expenses (definitely). Only product-based businesses have costs. In the profit equation, you start with revenues, then deduct costs and expenses. When the result is positive, you have profits. When it’s negative, your company has sustained a loss for the period.

  In the profit equation, a product-based company with costs will see an additional and crucial subtotal called gross profit (when expressed as a percentage, it’s called gross margin). That number represents the revenue left over once you take out the direct costs of the products you are selling. The gross profit tells you how much you have available to cover all the rest of your expenses, ideally leaving some net profit at the end.

  In this chapter, you’ll learn everything you need to know about revenues, costs, and expenses, from setting appropriate prices to monitoring and managing product costs to tracking the daily operating expenses. How well a company manages these three income components determines whether they’ll enjoy net profits, or suffer net losses.

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  REVENUES

  Let’s Make a Deal

  The goal of every small business is to rack up revenues (also called sales). After all, revenues are the first step on the path to profits. When it comes to recording revenues for accounting purposes, though, it’s not quite as simple as just ringing up a sale. There are different types of sales transactions, and different accounting methods to use. With all the variables surrounding a single sales transaction, the accounting can seem overwhelming, but each transaction really involves just a few basic steps to get the entry recorded and your business another step closer to profitability.

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  eBook - ePub

  Media Economics

  Applying Economics to New and Traditional Media

  • Colin Hoskins, Stuart McFadyen, Adam Finn(Authors)
  • 2004(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  Theory of the Firm . Firms are assumed to maximize profits. Profits are equal to total revenue minus total cost. Thus a firm chooses to produce at the output level or price that maximizes the difference between total revenue and total cost. In the last chapter, we examined how cost varied with output. The first topic we examine in this chapter is how revenue varies with output and price. By bringing together the revenue with the cost side examined in the last chapter, we are able to explore the level of output and price that maximizes profits and the use of marginal analysis in determining these. Incremental analysis and discounting are introduced as managerial techniques firms can use to identify the most profitable option in real-world situations. We examine in detail how the economist measures profit, how this differs from the accountant’s concept of profit, and the implications for decision making by firms. Two managerial decision techniques, incremental analysis and net present value, are explored. The implications of risk for business decisions are considered.

  6.1 Revenue

  We need to distinguish between total revenue, average revenue, and marginal revenue, and examine the relationship between these revenue concepts. We will do this assuming that each unit of output sold is sold at the same price.

  Total revenue (TR) is equal to the quantity (Q) sold of a good or service multiplied by the price (P) at which it is sold:

  TR = Q × P  

  Average revenue (AR) is the revenue per unit of output. It equals total revenue divided by quantity:

  AR = TR/Q  

  But as TR = Q × P, substituting for TR in this equation gives AR = Q × P/Q = P. Hence AR is equal to price. This relationship implies that a firm’s demand curve is also its average revenue curve. The demand curve shows the quantity demanded at any given price. The average revenue curve shows the average revenue, equal to price, for any quantity demanded. Hence a firm’s demand curve often has an AR label attached to it as well as a D.

  Marginal revenue (MR) is the change in total revenue resulting from the output of one more unit of the good or service:

  MR = ΔTR/ΔQ   where ΔTR is the change in total revenue and ΔQ is the (one unit) change in output.

  If the firm can sell the additional unit at an unchanged price, then the demand curve for the firm is horizontal, and marginal revenue equals price. As we will see later, however, this only holds for perfect competition, a very competitive situation in which many companies sell an identical product.

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