THE KEY

MEASURES AND
RELATIONSHIPS
MODULE 2
 GROUP 1
GRANDE, ANGELIE
HANAYA, ALYSSA
HUBAHIB, LEA JANE
LAGNAS, JAINEY
MUSNI, JHOREM
NAVA, DESIREE
ROTOR, REANNE KESSLE
LEARNING OBJECTIVES
1. Describe the concept of the different costs and
revenue
2. Distinguished fixed and variable costs
3. Compute the different kinds of cost and revenues
4. Distinguished economic versus accounting business
cost and profit
5. Compute total profit
6. Know the concept of breakeven analysis
This module 2 will be covering some of the key measures and
relationships of a business operation. To help illustrate those
concepts, we will consider the following simple business venture
opportunity.
For example:
Suppose three students like spending time at the beach. They
have pondered whether they could work and live at the beach
during their summer break and learned that they could lease a
small building by the beach with existing freezer capacity and
apply for a local license to sell ice cream bar.
Revenue, Cost and Profit
Most businesses sell something either
physical commodity like an ice cream bar
or a service like a car repair shop. In a
modern economy, that sale is made to
return many or at least is evaluated in
monetary terms.
REVENUE

IT IS THE TOTAL MONETARY VALUE

OF THE GOODS AND SERVICES. FEW
BUSINESSES ARE ABLE TO SELL
SOMETHING WITHOUT INCURRING
EXPENSES TO MAKE THE SALE
POSSIBLE.
COSTS
THE COLLECTIVE EXPENSES INCURRED
TO GENERATE REVENUE OVER A
PERIOD OF TIME, EXPRESSED IN TERMS
OF MONETARY VALUE.

1. VARIABLE COSTS
2. FIXED COSTS
 VARIABLE COSTS
Cost elements which are related to the volume of
sales; that is, as sales go up, the expenses go up. This
are costs that do change with the amount produced.

For example:
The costs of raw materials used to make an item of
clothing.
 FIXED COSTS
Costs which are largely invariant to the
volume of sales, at least with a certain range of
sales volume. This are costs that don't change
with the amount produced.

For example:
The costs of machine for cutting cloth to make
an item of clothing would be fixed costs.
PROFIT
THE DIFFERENCE BETWEEN TOTAL
REVENUE AND TOTAL COSTS.
WHEN COSTS EXCEEDS REVENUE,
THERE IS A NEGATIVE PROFIT OR A
LOSS. WHEN THE REVENUE EXCEEDS
COSTS, THERE IS A PROFIT.
FORMULA

Total Cost = Fixed Cost + Variable Cost

Marginal Cost = Change in Cost

Change in Quantity
 FORMULA
Per Unit Cost
(Average Variable Cost) AVC = Variable Cost
Quantity

(Average Fixed Cost) AFC = Fixed Cost

Quantity

(Average Total Cost) ATC = AVC + AFC

TABLE 2.1 COST-OUTPUT
RELATIONSHIP
 Simple Business Venture Opportunity
Suppose three students like spending
time at the beach. They have pondered
whether they could work and live at the
beach during their summer break and
learned that they could lease a small
building by the beach with existing freezer
capacity and apply for a local license to sell
ice cream bar.
 The students in our simple venture realize they need to
determine whether they can make a profit from a summer
ice cream bar business. They met the person who operated
an ice cream bar business in this building the previous
summer. He told them last summer he charged P1.50 per
ice cream bar and sold 36,000 ice cream bars. He said the
cost of the ice cream bars—wholesale purchase, delivery,
storage, and so on—comes to about P0.30 per bar. He
indicated his other main costs—leasing the building,
license, local business association fee, and insurance—
came to about P16,000.
Based on this limited information, the students could
determine a rough estimate of the revenue, costs, and
profit they would have if they were to repeat the
outcomes for the prior operator. The revenue would be
P1.50 per ice cream bar times 36,000 ice cream bars,
equals to P54,000. The variable cost would be P0.30 per
ice cream bar times 36,000 ice cream bars, resulting to
P10,800. The fixed cost would be P16,000, making the
total cost of P26,800. The profit would be P54,000
minus P26,800, equals to P27,200.
Revenue:P1.50 x 36,000 = P54,000

Variable Cost: 36,000 x P0.30 = P10,800

Fixed Cost: P16,000

Total Cost: P10,800 + P16,000 = P26,800

Profit: P54,000 - P26,800 = P27,200

ECONOMICS VERSUS ACCOUNTING
MEASURES OF COSTS AND PROFIT

The discipline of accounting provides guidelines for the

measurement of revenues, costs and profits. Having the analyses
based on generally accepted principles is important for making
exchanges in our economy.
For example:
Corporation must produce financial statements to help investors
and creditors assess the health of the corporation. Individual and
businesses must produce tax return to determine a fair
measurements of income for taxation purpose.
 Costs as measured according to
accounting principles are not
necessarily relevant measurements
for decisions related to operating or
acquiring a business.
 ECONOMIC PROFIT
SIMILAR TO ACCOUNTING
PROFIT BUT IT INCLUDES
OPPORTUNITY COSTS; IT ALSO
INCLUDES EXPLICIT COST AND
IMPLICIT COSTS WHICH ARE
IMPLIED OR IMPUTED COSTS.
 ACCOUNTING PROFIT
INCLUDES EXPLICIT COSTS SUCH
AS RAW MATERIALS AND
WAGES.
 BREAK-EVEN
ANALYSIS
a financial tool which helps a company
to determine the stage at which the
company or a new service or a product
will be profitable.
 BREAK-EVEN ANALYSIS
In other words, it is a financial
calculations for determining the number of
products or service a company should sell
or provide to lower its costs (particularly
Fixed Costs)
It is useful in studying the relation
between Variable Costs, Fixed Costs and
Revenue.
 SUMMARY
Revenue is the income that a firm receives from the sale of
a good or service to its customers.
Profit is the difference between the revenue received from
the sale of an output and the costs of all inputs used.
Cost is the monetary value that a company has spent in
order to produce something.
Fixed Cost are those expenditures that do not change
based on sales.
Variable Cost are expenses that changes in proportion to
how much a company produces or sells.
 SUMMARY
Marginal Cost is the additional cost to produce
each additional unit.
Economic Profit
Revenue - Explicit Cost - Implicit Costs
Accounting Profit
Revenue - Explicit Cost
Break - Even Analysis results in neither a profit
nor a loss.
 THANK YOU!

PREPARED BY:GROUP 1