GCSEBusinessAQARevision NotesFinanceFinancial Terms & CalculationsFinancial Terms & Calculations

Financial Terms & Calculations (AQA GCSE Business)

Revision Note

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Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Business Costs

  • In preparing goods and services for sale, businesses incur a range of costs

    • Some examples of these these costs include purchasing raw materials, paying staff salaries and wages, and paying utility bills such as electricity  

  • These costs can be broken into different categories:

Fixed costs (FC)

  • These are costs that do not change as the level of output changes

  • These have to be paid whether the output is zero or 5000 

    • E.g. building rent, management salaries, insurance, bank loan repayments, etc.

Variable costs (VC)

  • These are costs that vary directly with the output

  • These increase as output increases, and vice versa

    • E.g. Raw material costs, wages of workers directly involved in the production

  • Total variable costs at a particular level of output are calculated using the formula

Total space variable space costs space equals space Variable space costs space per space unit space cross times space Number space of space units

Total costs (TC)

  • The sum of the fixed and variable costs at a particular level of output

  • Total costs at a particular level of output are calculated using the formula

Total space costs space equals space Fixed space costs space plus space Total space variable space costs

Fixed, Variable and Total Costs


Type of Cost


Diagram


Explanation

Fixed costs (FC)

3-7-1-fixed-costs

  • The firm has to pay its fixed costs, which do not change, irrespective of whether the output is 0 or 100,000 units

  • The fixed costs for this firm are $4,000

Variable costs (VC)

3-7-2-variable-costs

  • Variable costs initially rise proportionally with output, as shown in the diagram

  • At some point, the firm will benefit from a purchasing economy of scale and the rise will no longer be proportional

Total cost (TC)

_ZxiGabU_3-7-2-total-costs

  • The total cost is the sum of the variable and fixed costs at a particular level of output

  • The total costs cannot be zero, as all firms have some level of fixed costs

Worked Example

Fotherhill Organics Limited sold 43,539 packs of its specialist compost to mail-order customers in 2022. The cost to make and deliver each pack was £3.40. In addition, it incurred total fixed costs of £430,000

Calculate Fotherhill Organics total costs for 2022. [2]

Step 1: Calculate the total variable costs of compost

equals 43 comma 539 space cross times space £ 3.40 equals space £ 148 comma 033      [1 mark]
 

Step 2: Add total variable costs to total fixed costs

equals space £ 148 comma 033 space plus space £ 430 comma 000 equals space £ 578 comma 033     [1 mark]

Revenue

  • Revenue is the value of the units sold by a business over a period of time

    • E.g The revenue earned by Apple Music from sales of music downloads 

  • Revenue is calculated using the formula

Revenue space equals space Selling space price space cross times space Quantity space sold

  • Revenue usually increases as the sales volume increases

Worked Example

Fotherhill Organics Limited sold 39,264 packs of its specialist compost to mail-order customers in 2022. The price per pack was £8.75. In addition, it sold 4,275 tonnes to gardening businesses for £123.95 per tonne.

Calculate Fotherhill Organics revenue for 2022. [3 marks]

Step 1: Calculate the revenue from sales to mail-order customers

39,264 x £8.75        =        £343,560       [1]
 

Step 2: Calculate the revenue from sales to gardening businesses

4,280 x £123.95       =        £530,506    [1]
 

Step 3: Add the two revenue figures together

   £343,560 + £530,506            =       £874,066            [1]

  • You could be asked to calculate revenue per item using costs and profit data

Worked Example

A business makes £9 profit per item. Variable costs are £2.30 per item, and fixed costs of £8.45 are assigned to each item.

Calculate the revenue generated per item. [2 marks]

Step 1: Calculate total costs per unit (unit cost)

Total space costs space equals space £ 2.30 space plus space £ 8.45 equals space £ 10.75 [1]

Step 2: Add profit to total costs

Revenue space equals space £ 10.75 space plus space £ 9 equals space £ 19.75 [1]

Profit & Loss

  • Profit is a surplus that remains after business costs have been subtracted

    • If costs exceed revenue, the business makes a loss

  • Most businesses have the main objective of making a profit

    • Profits help new businesses survive and break-even

    • It is a reward for risks taken by entrepreneurs and investors

    • Established businesses can use profit to fund long-term growth 

  • The most simple formula for calculating profit is:

Profit space equals space Revenue space minus space Total space c osts

  • Profit can be increased using the following strategies:

    • Increasing revenue 

    • Reducing costs

    • A combination of increasing revenue and reducing costs

Worked Example

In 2022 Fotherhill Organics Limited achieved revenue of £874,066 from sales of its specialist compost. In addition, it incurred total costs of £578,033

Calculate Fotherhill Organics profit for 2022. [1 mark]

Step 1: Subtract total costs from revenue

equals £ 874 comma 066 space minus space £ 578 comma 033 equals space £ 296 comma 033        [1]

Examiner Tips and Tricks

When you answer calculation questions, remember:

  • Take care that your figures are easily recognisable

    • In some cases, the number 4 and the number 9 could be confused by the examiner

  • Check the number of decimal places or significant figures required

    • If you only give  your answer to one decimal place rather than two, you will lose a mark, even if your answer is correct

  • Place your final solution on the dotted line at the bottom of the answer box

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.