Costs and Profit (SQA National 5 Business Management): Revision Note

Fixed costs

• 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

• 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 production

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

Total costs

• Total costs are 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

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 usually increases as sales volume increases

Profit

• Profit is the difference between total revenue and the total costs of a business

• Most businesses have the main objective of making a profit

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

  • For more established businesses, profits can enable long-term growth 

• The simplest formula for calculating profit is:

• Profit is the surplus that remains after business costs have been subtracted from the total sales revenue

  • If costs exceed revenue, the business makes a loss