Revenue Vs. Total Cost Vs. Variable Cost
Most companies exist to earn a profit. To achieve this goal, companies may sell products or provide services to consumers. Companies calculate the profit they earn by subtracting their total cost, or expenses, from their income, or revenue. A company's total cost includes all of the costs it incurs during the production and sale of its products or services.
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Revenue
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A company's gross revenue includes all of the money it receives from customers when it provides a service or sells its goods. However, most companies encounter situations in which they must refund a customer's money, such as when products are lost in shipping or returned. To account for these situations, the company also must calculate its sales revenue, which is the amount of income it earns after subtracting the cost of refunds.
Total Cost
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A company's total cost includes its fixed and variable costs. Total costs may include explicit expenses, such as taxes, raw materials and wages paid to employees. Total costs also may include implicit expenses, such as the value of the business owner's time. To calculate profit, the company must subtract its total cost from its sales revenue. For example, a company with an annual sales revenue of $300,000 and total costs of $120,000 would have a profit of $180,000 (300,000 - 120,000 = 180,000).
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Variable costs
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A company can classify all of its production costs as either fixed or variable. A fixed cost is a cost that remains the same regardless of the company's level of productivity, such as rent or utilities. A variable cost, however, is an expense that varies based on the company's productivity. Examples of variable costs include the cost of raw materials and wages paid to employees.
Applications
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A company may use its total costs and revenue to create a mathematical function for calculating profit based on productivity. This function allows the company to determine the amount of products it must produce to earn the highest profit possible in a given time period. The company also can use the formula to determine the number of products it must produce to break even.
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