What is cost and revenue in economics?, Types of cost, Revenue calculation formula.

Cost and revenue in economics

Cost and revenue are the two most important terms in business economics. The target of every business is to minimize the cost and maximize the revenue so that business makes the maximum profit.
Now let me explain, each term separately-

What is Cost?

Cost is the monetary value that every business has spent to produce some product and service.
what is cost and revenue
Cost
In every business, the cost is the monetary valuation of raw materials, time, effort, and other resources that are used to make the product.
In this case, money is the input of the production system in order to acquire the desire product or services. During business planning for a company, project, or product it is important to estimate the cost in order to ensure the profit.

Types of cost

Generally, there are two types of cost-
  • Direct cost,
  • Indirect cost.

Direct cost

Direct costs are those costs that are directly involved with the manufacturing of the product. Direct costs include raw material cost, cost related to workers, etc.

Direct cost
Direct cost

Direct cost is dived into three categories,
1. Direct Materials cost:
Direct materials cost is the cost of raw materials that are directly involved with the unit of production. It is a variable cost involved in the production process.
Examples of direct materials are – The timber used during house construction, the steel used in an automobile, the Circuit board included in electronic devices, the cost of steel is the direct material cost in nut-boult manufacturing, etc.
 
2. Direct labor cost:
Direct labor cost is the cost of work done by the workers, who actually make the product in the production line.

Direct labor costs are generally associated with the products In a job costing environment,  the production stuff if the record of their working hour. In service industries, direct labor cost is associated with consulting, tax preparation, auditing, etc where employees measure their working hours by the number of jobs so that employers can bill customers based on the direct labor cost.
3. Manufacturing overhead cost:
Manufacturing overhead cost is the cost of indirect materials such as lubricant, indirect labor such as maintenance labor, cleaning labor, rent, insurance, compensation of plant managers, property taxes, etc.


Indirect cost

Indirect costs are not directly involved with the manufacturing of a product.  Examples of indirect costs are the salary of sales personnel, advertising cost, cost of rags, and solvents used during house construction, the grease used on machinery, etc.
There are two types of indirect cost-

1. Selling and distribution costs:
Selling and distribution costs involve salary, the incentive of sales personnel, and distribution costs like commission or salary of the distributor, advertising cost, etc. Selling and distribution costs are categorized as Indirect costs because they are not directly involved during production. Some components are changed with the change of sale volume, While other components remain the same. That’s why it is a semi-variable cost.

selling cost
Selling cost
2. Administrative costs:
Administrative costs are known as a fixed cost or overhead cost, these costs are not directly affected by manufacturing or sales volume, therefore the administrative cost is known as a fixed cost. 
Administrative costs include the salary of leadership and managers, accountant, project managers, etc.

Administrative cost
Administrative cost

What is revenue?

revenue is the total money generated by selling goods and services within a specific time, before dedicated any expenses.
Revenue
Revenue
revenue is also referred to as turnover. Some companies are generating revenue by normal business activities, selling products, etc. On the other hand, some companies receive revenue from interest, royalties, etc.
The government receives tax revenue from taxpayers. An organization generates sales revenue by selling products over a time period.

Operating expenses:

Operating expenses are the cost needed to run its normal business operations. Operating expenses are necessary for most of the businesses. 
Operating expenses include inventory cost, rent, marketing, equipment, insurance, research and development cost, etc.
Reduction in operating expenses means compromising product quality. so finding the perfect balance is difficult but can yield significant rewards.

Calculation of revenue:

Revenue can be calculated as –
Sales revenue = Price of goods x number of units sold.
(In revenue, we are not deducting any expenses associated with the manufacture of the product.)
Revenue does not give a clear picture of the success of a company. Net profit tells you about the success of a company.
Net profit = Revenue – expenses.

So, we can conclude that cost and revenue both are a very important factor for an organization, where cost is the monetary value that every business has spent to produce some product and service, on the other hand, revenue is the total money generated by selling those goods and services.

Reference

1. https://www.accountingtools.com/articles/what-is-direct-material-cost.html#:~:text=Direct%20material%20cost%20is%20the,considered%20to%20be%20joint%20costs).
2. https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/pages/selling-expenses.aspx#:~:text=Selling%20expenses%20are%20the%20costs,selling%20a%20product%20or%20service.&text=The%20others%20are%20administration%20and,logistics%2C%20shipping%20and%20insurance%20costs

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