CAIE A-Level Business 5.4 Costs Question Bank

Practise classifying and calculating costs, comparing full and contribution costing and using break-even or profit information to support pricing, performance and special-order…

Exam points

classify fixed, variable, direct and indirect costs before calculating totals or unit figures
use contribution or full costing for the stated decision and distinguish contribution from profit
calculate and interpret break-even, margin of safety or profit before evaluating limitations

Covered syllabus points

5.4.1—Cost information 5.4.2—Costing approaches 5.4.3—Cost information uses 5.4.4—Break-even analysis

[Maximum number: 3]

Explain the term variable costs.

Figure for Answer to Question 5.4 Costs question 1 — CAIE A-Level Business AS

Indicative content:

AO1 Knowledge and understanding

Knowledge of variable costs ${ }^{\mathrm{NF} \mathrm{F}}$ may include:

- Costs that vary with output

AO2 Application

Limited application ${ }^{\text {App }}$ applies knowledge of variable costs to one of the factors:

Developed application ${ }^{\triangle \mathrm{FP}}+{ }^{\mathrm{AFP}}$ applies knowledge of variable costs to two of the factors

- Any relevant example e.g. raw materials, packaging

- Increase or decrease with the production volume

- Increase or decrease with the sales volume

Application can be made to the source material or any other scenario/context/business/person

Accept all valid responses.

1(a)(ii)

Exemplar and annotations

Expenses that change with the level of output □ such as raw materials ${ }^{\mathrm{AFP}}$ for example the flour used for cakes.

Mark

Rationale

There is developed application of raw
materials (flour) as well as clear knowledge
of the concept at the start of the response.

Expenses that change with the level of output □ such as raw
materials ${ }^{\mathrm{APF}}$ .

2

Knowledge first, followed by application to
an example

Expenses which vary with output K .

Expenses which do not stay the same $\boxed{T^{\mathrm{TV}}}$

1

Knowledge mark. No attempt to apply.

0

No link to output

[Maximum number: 8]

Analyse two limitations to a business of using contribution costing.

Analyse two limitations to a business of using contribution costing.

There are 8 marks in total for Q5(a) - 4 marks for each of the two limitations to a business of using contribution costing:

1 mark for

1 mark for

2 marks for

Indicative content

Responses may include:

AO1 Knowledge and understanding

1 mark for identifying one limitation to a business of using contribution costing

- It allocates only direct costs to cost/profit centres

- Overhead costs not apportioned at all

- May provide a misleading picture of profitability

- It overlooks the impact of fixed costs

- Not acceptable for external financial reporting

- Difficult to allocate costs accurately across a full product range

- Not an appropriate method for price determination

- Unsuitable for capital intensive operations/multi-product operations

5(a)

AO2 Application

1 mark for application of one limitation to a business of using contribution costing

- Difficult to analyse as not all costs can be easily split into fixed and variable costs.

- Poor method for setting prices - as prices are based on contribution which does not cover fixed costs.

- It violates the principle of matching costs with revenues

- Has limited scope - so businesses with high automation have high levels of fixed costs, so not suitable to capital intensive industries.

- Can lead to unrealistic financial statements - as exclusion of fixed overheads in valuation of stock.

- Firms might find it difficult to cover all costs and earn a fair return on capital employed

AO3 Analysis

2 marks for developed analysis of one limitation to a business of using contribution costing L2

1 mark for limited analysis of using contribution costing L1

- Not acceptable for stock valuation - if stock is undervalued it could lead to government investigation/fines - affect business image

- Unrealistic financial statements - could lead to investors withdrawing from the business or government fines.

- Under-pricing of products - which leads to poor return on capital employed and low profits - shareholder dissatisfaction

- Costs can be difficult to allocate - which leads to inaccurate pricing decisions - lose customer loyalty

- Can lead managers to maintain the production of goods just because of positive contribution - perhaps a brand new product should be launched instead which makes a greater contribution.

- If lower prices are offered to gain customers as contribution can still be earned - may lead to existing customers demanding lower prices - lower profits.

- If high prices are a key feature that has established brand - then lowering prices could destroy brand image.

Accept all valid responses.

[Maximum number: 6]

(a)

Refer to Table 1.1 and other information. Calculate the change in forecast profit if the new product is launched.

[ 3 ]

(b)

Explain one way PS could use cost information to improve business performance.

[ 3 ]

Explain one way PS could use cost information to improve business performance.

Figure for Answer to Question (b) — CAIE A-Level Business AS

Indicative content - Responses may include:

AO1 Knowledge and understanding:

Knowledge of a use of cost information to improve business performance □ :

- Help make the investment decision / to obtain loans e.g from a bank.

- Identify unnecessary expense.

- Forecast profit.

- To set prices.

- To improve cash flow.

- other factors involved e.g. cost of investment, future market conditions, whether the product will be successful

No further marks can be gained without knowledge and understanding.

AO2 Application

Limited application ${ }^{\Delta \text { pp }}$ , applies knowledge to PS once.

Developed application ${ }^{\Delta \neq \mathrm{F}}+{ }^{\Delta p \mathrm{~F}}$ applies knowledge to PS twice OR applies once to PS AND develops answer to explain how it can help improve business performance.

- The profit has increased from $\$ 8 \mathrm{~m}$ to $\$ 13 \mathrm{~m}$ .

- Environmentally friendly.

- Added value.

- Expenses do not increase very much so can spread over higher number of units.

Accept all valid responses.

1(b)(ii)

Exemplar and annotations

To consider where costs can be reduced , $\kappa$ , as PS move to becoming more capital intensive which will require capital investment

To determine the impact on profits K , if PS launch the new packaging, ${ }^{\alpha^{\mathrm{FP}}}$ profits forecast to increase by $\$ 5 \mathrm{~m}$ (62.5\% or OFR)

Mark

Rationale

3

A use explained in the specific context of PS by using the
information in the case study and develops answer to
explain why it is useful.

3

A financial use in this one and there is context from the
data in Table 1.1., also how the use given is linked to the
issue.

To determine if PS can launch the new packaging
□ as costs will impact the decision □ but the forecast revenue increase is greater than the cost increase ${ }^{\star \mathrm{FD}}$ .

3

Although the ${ }^{\Delta F}$ appears first, it cannot be awarded until
the $\kappa$ has been found. However, there is obvious $\kappa$ , so
you can go back and award the

To compare labour costs , b because PS use different payment methods □ .

2

Relevant use $\kappa$ . The context linked to this is reasonable
□ , but is not developed.

To help improve cashflow □ as cost information includes fixed and variable costs □ NAQ

1

Knowledge of a use. The rest of the answer is not applying it to the context so □ NAQ (Not Answering Question).

To consider where costs can be reduced , ", to help improve cashflow □

1

Both are knowledge of a use but there is only 1 mark for knowledge □ .

All question bank results loaded

Covered syllabus points

5.4 Costs question 1

5.4 Costs question 2

5.4 Costs question 3

Question (a)

Question (b)