Financial and Budget Arithmetic: Costs, Revenue and Indexation
Financial arithmetic in EPSO papers means cost, revenue, margin, indexation and budget variance, typically framed in public-sector, procurement or programme-budget language with VAT and multi-year profiles.
Core rules
- Profit = revenue − cost. Margin = profit / revenue (the selling price). Markup = profit / cost. A 15% margin is not a 15% markup.
- VAT: a price including VAT at 20% is net × 1.20; the net is gross / 1.20. Never subtract 20% from the gross figure.
- Indexation: apply each year's multiplier in turn. 2.1% then 1.4% compounds to 1.021 × 1.014 = 1.035294, i.e. +3.53%, not +3.5%.
- Budget variance = actual − budgeted; fix the sign convention before answering.
- Break-even = fixed costs / (price − variable cost per unit).
Worked example
A contractor's direct cost is €85,000. Overheads are 12% of direct cost and the contractor wants a profit margin of 15% of the selling price. What is the price?
Cost including overheads = 85,000 × 1.12 = €95,200. If profit is 15% of the selling price, cost is 85% of it: price = 95,200 / 0.85 = €112,000. Profit = 112,000 − 95,200 = €16,800, which is exactly 15% of 112,000.
Had the question said a 15% markup, the answer would be 95,200 × 1.15 = €109,480. The two readings differ by €2,520, and both usually appear among the options.
Indexation over several years
A salary of €38,000 indexed by 2.1% and then 1.4% becomes 38,000 × 1.035294 = €39,341.17. Adding the two rates gives 3.5%, which understates the result; the gap matters when options are close.
Traps
- Using margin and markup interchangeably.
- Adding VAT rates or indexation percentages instead of compounding them.
- Applying indexation to a figure that is already nominal.
- Mixing net and gross figures within a single calculation.