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Business Studies

Revenue, costs and profit

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All businesses should keep proper accounts. This involves the calculation of revenue, costs and profit.

Revenue

Revenue is the income earned by a business over a period of time, eg one month. The amount of revenue earned depends on two things - the number of items sold and their selling price. In short, revenue = price x quantity.

For example, the total revenue raised by selling 2,000 items priced £30 each is 2,000 x £30 = £60,000.

Revenue is sometimes called sales, sales revenue, total revenue or turnover.

Costs

Office Blocks

Renting an office block is part of a company's fixed costs

Costs are the expenses involved in making a product. Firms incur costs by trading.

Some costs, called variable costs, change with the amount produced. For example, the cost of raw materials rises as more output is made.

Other costs, called fixed costs, stay the same even if more is produced. Office rent is an example of a fixed cost which remains the same each month even if output rises.

Graph showing the fixed, variable and total costs in a business

Fixed costs, variable costs and total costs

Another way of classifying costs is to distinguish between direct costs and indirect costs. Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product.

The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).

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