Costs, Revenue and Profit
The basic financial terms every business uses: fixed, variable and total costs, revenue from sales, and how profit or loss is worked out by taking costs away from revenue.
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Free interactive practice at using the material, which is what the marks are for.
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Does the business make money?
Every business has to know what it spends, what it earns, and whether it ends up ahead. That means sorting its costs, adding up its revenue, and working out its profit or loss. This module covers the basic financial terms and the simple calculations that link them together.
Finance words to know
Learn these before you do the calculations.
Fixed against variable
The key split in costs is whether they change with output.
Sort the cost, then do the sum
In the exam, first sort each cost: does it stay the same whatever the output, making it fixed, or rise with output, making it variable? Total cost is the two added together. Revenue is the price times the number sold. Take total costs from revenue and a positive answer is a profit, a negative one a loss.
Match the term
- fixed cost
- variable cost
- revenue
- profit
- stays the same whatever the output
- rises as more is produced
- the money taken in from sales
- revenue left after total costs
Fixed or variable?
- the rent on the shop
- a managers fixed salary
- the materials in each product
- packaging for each item sold
- a fixed cost, it does not change
- a fixed cost, paid whatever the output
- a variable cost, more output means more
- a variable cost, one per item sold
How is profit found?
How does a business work out its profit?
- By taking total costs away from revenue.
- By adding total costs to revenue.
- Profit is just the same as revenue.
- By counting only the fixed costs.
True about costs
Select the TWO statements that are correct.
- Total cost is fixed cost plus variable cost
- A loss happens when costs are greater than revenue
- Rent is a variable cost
- Revenue and cost mean the same thing
Work out the profit
In a month a business takes 100 units in revenue and its total costs are 70 units. Subtract the total costs from the revenue to find its profit. What is the answer?
Order the calculation
Put the steps of working out profit in order, earliest first.
- Add fixed and variable costs for total cost
- Work out the revenue from sales
- Take total costs from revenue
- Decide if it is a profit or a loss
Complete the summary
A cost that stays the same whatever the output is a _____ cost, while one that rises with output is a _____ cost. Adding the two gives the _____ cost. When total costs are taken from revenue, a positive result is a _____.
Spot the fixed costs
Tap the TWO costs that are fixed, staying the same whatever the output.
- the monthly rent
- the yearly insurance
- materials for each unit
- packaging for each sale
Work out the business
Read each case and choose the best answer.
- A firm pays the same rent whether it makes 10 items or 1000. What kind of cost is the rent?
- A business earns 80 units in revenue but its total costs are 95 units. What is the result?
- A maker uses more clay the more pots it makes. What kind of cost is the clay?
Explain the finances
Explain the difference between fixed and variable costs, and how a business works out whether it made a profit or a loss.
- Define fixed and variable costs with an example of each
- Explain how total cost and revenue are found
- Explain how profit or loss is worked out