Revenue, Profits, Price & cost

 

Revenue

In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover. Some companies receive revenue from interest, royalties, or other fees.[1] Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time, as in “Last year, Company X had revenue of $42 million”. Profits or net income generally imply total revenue minus total expenses in a given period. In accounting, revenue is often referred to as the “top line” due to its position on the income statement at the very top. This is to be contrasted with the “bottom line” which denotes net income (gross revenues minus total expenses).[2]

For non-profit organizations, annual revenue may be referred to as gross receipts.[3] This revenue includes donations from individuals and corporations, support from government agencies, income from activities related to the organization’s mission, and income from fundraising activities, membership dues, and financial securities such as stocks, bonds or investment funds.

In general usage, revenue is income received by an organization in the form of cash or cash equivalents. Sales revenue or revenues is income received from selling goods or services over a period of time. Tax revenue is income that a government receives from taxpayers.

In more formal usage, revenue is a calculation or estimation of periodic income based on a particular standard accounting practice or the rules established by a government or government agency. Two common accounting methods, cash basis accounting and accrual basis accounting, do not use the same process for measuring revenue. Corporations that offer shares for sale to the public are usually required by law to report revenue based on generally accepted accounting principles or International Financial Reporting Standards.

In a double-entry bookkeeping system, revenue accounts are general ledger accounts that are summarized periodically under the heading Revenue or Revenues on an income statement. Revenue account names describe the type of revenue, such as “Repair service revenue”, “Rent revenue earned” or “Sales”.[4]

https://en.wikipedia.org/wiki/Revenue


Profit

Profit, in accounting, is an income distributed to the owner in a profitable market production process (business). Profit is a measure of profitability which is the owner’s major interest in income formation process of market production. There are several profit measures in common use.

Income formation in market production is always a balance between income generation and income distribution. The income generated is always distributed to the stakeholders of production as economic value within the review period. The profit is the share of income formation the owner is able to keep to himself in the income distribution process. Profit is one of the major sources of economic well-being because it means incomes and opportunities to develop production. The words income, profit and earnings are substitutes in this context.

Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. In production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of commodities and increasing incomes from growing and more efficient market production.

The most important forms of production are

In order to understand the origin of the economic well-being we must understand these three production processes. All of them produce commodities which have value and contribute to well-being of individuals.

The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. Improving the quality-price-ratio of commodities is to a producer an essential way to enhance the production performance but this kind of gains distributed to customers cannot be measured with production data.

Economic well-being also increases due to the growth of incomes that are gained from the growing and more efficient market production. Market production is the only one production form which creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production. Thus market production has a double role in creating well-being, i.e. the role of producing developing commodities and the role of creating income. Because of this double role, market production is the “primus motor” of economic well-being and therefore here under review.

https://en.wikipedia.org/wiki/Profit_(accounting)


Price

In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.[1]

In modern economies, prices are generally expressed in units of some form of currency. (For commodities, they are expressed as currency per unit weight of the commodity, e.g. euros per kilogram.) Although prices could be quoted as quantities of other goods or services this sort of barter exchange is rarely seen. Prices are sometimes quoted in terms of vouchers such as trading stamps and air miles. In some circumstances, cigarettes have been used as currency, for example in prisons, in times of hyperinflation, and in some places during World War 2. In a black market economy, barter is also relatively common.

In many financial transactions, it is customary to quote prices in other ways. The most obvious example is in pricing a loan, when the cost will be expressed as the percentage rate of interest. The total amount of interest payable depends upon credit risk, the loan amount and the period of the loan. Other examples can be found in pricing financial derivatives and other financial assets. For instance the price of inflation-linked government securities in several countries is quoted as the actual price divided by a factor representing inflation since the security was issued.

Price sometimes refers to the quantity of payment requested by a seller of goods or services, rather than the eventual payment amount. This requested amount is often called the asking price or selling price, while the actual payment may be called the transaction price or traded price. Likewise, the bid price or buying price is the quantity of payment offered by a buyer of goods or services, although this meaning is more common in asset or financial markets than in consumer markets.

Economists sometimes define price more generally as the ratio of the quantities of goods that are exchanged for each other.

Price theory Economic theory asserts that in a free market economy the market price reflects interaction between supply and demand: the price is set so as to equate the quantity being supplied and that being demanded. In turn these quantities are determined by the marginal utility of the asset to different buyers and to different sellers. In reality, the price may be distorted by other factors, such as tax and other government regulations.

When a commodity is for sale at multiple locations, the law of one price is generally believed to hold. This essentially states that the cost difference between the locations cannot be greater than that representing shipping, taxes, other distribution costs and more. In the case of the majority of consumer goods and services, distribution costs are quite a high proportion of the overall price, so the law may not be very useful.

https://en.wikipedia.org/wiki/Price


Cost

In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

More generalized in the field of economics, cost is a metric that is totaling up as a result of a process or as a differential for the result of a decision.[1] Hence cost is the metric used in the standard modeling paradigm applied to economic processes.

Costs (pl.) are often further described based on their timing or their applicability.

https://en.wikipedia.org/wiki/Cost

Types of Costs

A list and definition of different types of economic costs

costs

Fixed Costs (FC). The costs which don’t vary with changing output. Fixed costs might include the cost of building a factory, insurance and legal bills. Even if your output changes or you don’t produce anything, your fixed costs stays the same. In the above example, fixed costs are always £1,000.

Variable Costs (VC). Costs which depend on the output produced. For example, if you produce more cars, you have to use more raw materials such as metal. This is a variable cost.

Semi-Variable Cost. Labour might be a semi-variable cost. If you produce more cars, you need to employ more workers; this is a variable cost. However, even if you didn’t produce any cars, you may still need some workers to look after empty factory.

Total Costs (TC)  – Fixed + Variable Costs

Marginal Costs – Marginal cost is the cost of producing an extra unit. If the total cost of 3 units is 1550, and the total cost of 4 units is 1900. The marginal cost of the 4th unit is 350.

Opportunity cost – Opportunity cost is the next best alternative foregone. If you invest £1million in developing a cure for pancreatic cancer, the opportunity cost is that you can’t use that money to invest in developing a cure for skin cancer.

Economic Cost. Economic cost includes both the actual direct costs (accounting costs) plus the opportunity cost. For example, if you take time off work to a training scheme. You  may lose a weeks pay £350, plus also have to pay the direct cost of £200. Thus the total economic cost = £550.

Accounting Costs – this is the monetary outlay for producing a certain good. Accounting costs will include your variable and fixed costs you have to pay.

Sunk Costs. These are costs that have been incurred and cannot be recouped. If you left the industry you cannot reclaim sunk costs. For example, if you spend money on advertising to enter an industry, you can never claim these costs back. If you buy a machine, you might be able to sell if you leave the industry.

Avoidable Costs. Costs that can be avoided. If you stop producing cars, you don’t have to pay for extra raw materials and electricity. Sometimes known as an escapable cost.

Market Failure

  • Social Costs. This is the total cost to society. It will include the private costs plus also the external cost (cost incurred by a third party). May also be referred to as ‘True costs’
  • External Costs. This is the cost imposed on a third party. For example, if you smoke, some people may suffer from passive smoking. That is the external cost.
  • Private costs. The costs you pay. e.g. the private cost of a packet of cigarettes is £6.10
  • Social Marginal Cost. The total cost to society of producing one extra unit. Social Marginal Cost (SMC) = Private marginal cost (PMC) + External marginal Cost (XMC)

Diagram of Costs

For diagrams of costs see: Diagrams of cost curves

 

Average Cost Curves

cost-curves

  • ATC (Average Total Cost) = Total Cost / quantity
  • AVC (Average Variable Cost) = Variable cost / quantity
  • AFC (Average Fixed Cost) = Fixed cost / quantity

 

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