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calculating costs revenue and profit

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Jonathon shuttleworth

on 30 September 2014

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Transcript of calculating costs revenue and profit

Calculating Costs, Revenue and Profit
REVENUE CAN BE CALLED 3 different things so watch out; these are


But remember these all mean the same thing
REVENUE the amount income from business activity.

This is calculated by the following formula:

Selling Price x Sales (number of units sold)

Sales are the amount of products or services sold
Calculate the total revenue for Love Wood
Selling price X Number of units sold
£83 X 4000 = £332,000
Total Revenue = £332,000
Calculating Costs
Costs are amounts that the business incurs in order to make goods and/or provide a service
Fixed Costs
These are costs that
change with output

Fixed costs include:
Rent and Rates
Salaries (not wages!)
Loan Repayments

These costs stay constant regardless of how much a company produces. This means that the more units are made, the less its costs to make each product/service
Entrepreneurs need to know
What it costs to produce the product or service
What the cost of marketing the product is
How high are the overheads of the business
what the potential costs of a business are?
Are the things that drains away the profits made by the business
Are the difference between making a good and poor profit margin
Are the main cause of cash flow problems in a small business
change as the output or activity of a business change - the entrepreneur needs to know how these are likely to change
Cost are important because they..
Within a Business there are 2 types of Costs

Variable costs
Costs which change as output varies
Lower risk for a start-up: no sales = no variable cost
Fixed costs
Costs which do not change when output varies
Fixed costs increase the risk of a start-up
Examples of Variable costs
Raw materials
Bought-in stock
Wages based on hours worked or amounts produced
marketing costs based on sales (e.g. commission)
Examples of fixed cost
Rent & Rates
Insurance, banking & legal fees
Consultant and adviser cost
Design and development
Calculating Total Costs
The Total costs of a business can be calculated using this formula:

Total costs (TC) =
Fixed Costs (FC) + total Variable Costs (TVC)
Calculating Profit
Profit is the surplus revenue that is left after costs have been taken off
Formula -

Total Sales Revenue - Total cost = PROFIT
Problems estimating Costs
Rent, salaries, advertising campaigns
Some costs are easier to estimate and control:
Others are much harder:
Raw materials - affected by wastage
Product returns or refunds - effected by quality
where the entrepreneur does not have detailed experience of the market
Full transcript