Costs, revenue, profit and loss
AQA also says:
Spec content: Basic financial terms; Basic financial calculations.
Students should be able to: understand the difference between variable costs, fixed costs and total costs; understand the concept of revenue, costs, profit and loss. Note: these concepts also appeared in 3.1.6 — this section reinforces them with a stronger calculation focus as part of the Finance topic.
The Core Financial Calculations
Understanding a business's financial position requires confident use of a small number of fundamental formulae. AQA requires students to be able to calculate and interpret these across a range of business contexts.
Costs
Fixed costs (FC) do not change with output — they must be paid regardless of how much the business produces. Examples: rent, insurance, management salaries, loan repayments.
Variable costs (VC) change directly with the level of output — more production means higher variable costs. Examples: raw materials, packaging, direct labour per unit.
Total costs (TC) = Total fixed costs (TFC) + Total variable costs (TVC)
Variable costs can be expressed per unit: Total variable costs = Variable cost per unit × Quantity produced
Revenue
Revenue (also called sales revenue or turnover) is the total income from selling goods or services, before any costs are deducted.
Revenue = Price per unit × Quantity sold
Profit and Loss
Profit = Revenue − Total costs
If total costs exceed revenue, the result is a loss — the business is spending more than it earns. Sustained losses deplete cash reserves and will eventually force the business to cease trading unless the position is reversed.
Worked Example
A candle maker has:
- Fixed costs: £1,200/month (rent, insurance)
- Variable cost per candle: £2.50 (wax, wick, jar, packaging)
- Selling price: £7.00 per candle
- Output/sales: 500 candles per month
Total variable costs = £2.50 × 500 = £1,250
Total costs = £1,200 + £1,250 = £2,450
Revenue = £7.00 × 500 = £3,500
Profit = £3,500 − £2,450 = £1,050/month
Interpreting Financial Data
AQA expects students to interpret calculated financial data to inform business decisions:
- A rising profit margin indicates improving financial efficiency
- A falling profit despite rising revenue suggests costs are rising faster than sales
- A loss does not automatically mean failure — a new business may deliberately accept early losses while building market share — but sustained losses that cannot be financed will eventually force closure
- Comparing actual to forecast performance identifies whether the business is on track
Key Takeaways
- TC = TFC + TVC | TVC = VC per unit × Quantity
- Revenue = Price × Quantity sold
- Profit = Revenue − Total costs (negative result = loss)
- Fixed costs do not change with output; variable costs rise and fall with production volume.
- High revenue does not guarantee profit — costs must be controlled relative to revenue.