What this lesson is about
Classifying costs correctly, and recognising that most businesses earn from several different revenue streams rather than one.
Part 1 of 3
Costs, are, categorized, in, two, ways, that, can, be, confusing, since, both, use, similar, terms.
By, behaviour:, fixed, costs, don’t, change, with, output, in, the, short, run., Think, of, rent,, insurance,, or, salaried, staff., In, contrast, variable, costs, change, with, each, unit, produced,, like, raw, materials,, packaging,, or, piece-rate, labor., Then, there, are, semi-variable, costs,, which, include, both, fixed, and, variable, elements.
By, traceability:, direct, costs, can, be, directly, linked, to, a, specific, product., For, example,, the, leather, in, one, pair, of, shoes., On, the, other, hand, indirect, costs,, or, overheads,, can’t, be, traced, to, one, unit, and, need, to, be, distributed., This, includes, things, like, the, factory, manager's, salary, or, building, insurance.
Quick check
A machine leased exclusively for one product line, at a fixed monthly charge, is
The charge does not vary with output (fixed) and belongs entirely to one product line (direct).
Part 2 of 3
These, two, categories, are, independent,, and, that's, where, students, often, get, mixed, up., A, cost, can, be, both, fixed, and, direct,, like, a, machine, leased, just, for, one, product, line., It, can, also, be, variable, and, indirect,, like, electricity, that, increases, with, total, output, but, isn’t, tied, to, a, single, unit., When, classifying, a, cost,, you, usually, need, to, consider, it, on, both, axes.
Total, revenue, equals, price, multiplied, by, quantity, sold,, but, the, syllabus, focuses, on, how, organizations, often, earn, from, multiple, revenue, streams., Common, sources, include, regular, sales, advertising, sponsorship, subscription, fees, merchandise, royalties, franchise, fees, donations, subventions, (like, government, grants), rental, income,, and, interest.
Quick check
Factory electricity that rises with total output but cannot be traced to any single unit is
It responds to volume (variable) but cannot be attributed to one unit (indirect), showing the two axes are independent.
Part 3 of 3
Multiple, streams, are, important, for, two, reasons., They, spread, risk,, so, a, decline, in, one, source, doesn’t, cripple, the, organization., They, can, also, subsidize, each, other., For, instance,, a, football, club, might, operate, its, stadium, with, little, profit,, relying, on, merchandise,, broadcasting,, and, sponsorship, to, stay, afloat., Judging, such, an, organization, based, only, on, ticket, sales, can, be, misleading.
Quick check
Indirect costs are also known as
Overheads cannot be traced to a single unit and must be apportioned across products or departments.
Test what you just learned. Correct moves you up, wrong moves you down - reach 100 to master this lesson.