CAIE A-Level Business AS 5.4 Costs Questions

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

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: 2]

Define the term direct cost.

[Maximum number: 8]

Analyse two limitations to a business of using contribution costing.

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

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)

Explain the term direct costs (line 2).

[ 3 ]

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

Indicative content

AO1 Knowledge and understanding

Knowledge of direct cost(s) □ may include:

- Costs that are directly related to the production process.

- Costs that are directly attributed to operations/a cost centre.

No further marks can be gained without knowledge and understanding

AO2 Application

Limited application $\sqrt{\mathrm{EP}^{\mathrm{PFP}}}$ applies knowledge of direct to business costs, including:

- Amounts/things that are payable by a business / incurred by a business

OR

- Example or some other way of showing good understanding of a direct cost.

Developed application $\sqrt{\Delta \mathrm{Fe} P}+\Delta \mathrm{Fe}$ applies knowledge of direct to business costs, including

- Amounts/things that are payable by a business / incurred by a business

AND

- Example or some other way of showing good understanding of a direct cost.

Accept all valid responses.

(b)

Refer to Table 1.1. Calculate the change in GT's total costs between 2020 and 2022.

[ 3 ]

Indicative content.

- Formula: total costs = total revenue - profit (1)

- Calculation of cost in either 2020 or 2022 (1)

- Costs in 2020: $\$ 3.4 \mathrm{~m}-\$ 0.9 \mathrm{~m}=\$ 2.5 \mathrm{~m}$

- Costs in 2022: $ 2.8 m-0.2 m=$ 2.6 m

- Change in costs: $ 2.6 m-$ 2.5 m=$ 0.1 m(1 OFR )

Answer = $0.1m (3)

Accept answer as a percentage 4% (with % sign) as full marks

Exemplar and annotations

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

[Maximum number: 3]

Refer to Table 1.1. Calculate the change in GT's total costs between 2020 and 2022.

Figure for Answer to Question 4 — CAIE A-Level Business AS

[Maximum number: 3]

Festival Wear (FW)

FW is a partnership started by two friends, Maz and Jane. FW manufactures and sells high quality T-shirts at $ 40 each. The business can manufacture 35000 T-shirts per month using mass customisation. The T-shirts are only sold at music festivals and concerts and are customised to each event. FW has never advertised the T-shirts, relying on a sales team to attend a festival or concert and personally sell the T-shirts.

Current costs:
- variable: $ 10 per T-shirt
- fixed: $ 200000 per month.

Sales average 27000 T-shirts per month. Currently the sales team is paid a monthly salary, but Maz is proposing a new payment method in order to increase sales volume. This will mean a lower monthly salary but a commission of $ 2 per T-shirt will be paid. Maz estimates that sales volume would increase to 30000 per month.

Costs if the new payment method is introduced:
- variable: $ 12 per T-shirt
- fixed: $ 182000 per month.

Calculate FW's break-even output per month if the new payment method is introduced.

All question bank results loaded

Covered syllabus points

Question 1

Question 2

Question 3

Question (a)

Question (b)

Question 4

Question 5