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A LevelBusinessCambridge (CIE)Revision Notes5. Finance & AccountingCostsCost Information

Cost Information (Cambridge (CIE) A Level Business): Revision Note

Exam code: 9609

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

The need for accurate cost information

  • Cost information refers to data about all the costs involved in producing and selling a product

Why is accurate cost information needed?

Flowchart illustrating the need for accurate cost information linked to set prices, calculate profit, effective decision-making, control spending, break-even analysis.
Accurate cost information is needed to set prices, calculate profit, make decisions, calculate break-even and control spending

  • To set prices correctly

    • If a business underestimates its costs, it may set prices too low and make a loss

    • Overestimating costs may lead to prices that are too high, reducing demand

  • To calculate profit

    • Accurate costs help calculate gross profit and net profit, important for judging performance

  • For decision-making

    • Managers use cost data to decide whether to

      • Launch a new product

      • Continue or stop production

      • Change suppliers or production methods

  • To carry out break-even analysis

    • This helps decide how many units need to be sold to cover all costs.

    • Accurate costs make break-even analysis more reliable

  • To control spending

    • Comparing actual costs with budgets helps identify areas of overspending and take action

Types of costs

  • In preparing goods and services for sale, businesses incur a range of costs

  • These costs can be broken into different categories

Fixed costs

  • Fixed costs do not change according to output

  • These have to be paid whether the output is zero or 5,000 

    • Examples include rent, management salaries, insurance and bank loan repayments

Graph showing fixed costs at $4000, with a horizontal line across output levels. The vertical axis is labelled cost ($), and the horizontal axis is labelled output level.

  • Fixed costs in this instance are $4,000

Variable costs

  • Variable costs rise proportionally with output

  • These increase as output rises and decrease as output falls

    • Examples include raw material costs and wages of workers directly involved in production and packaging

  • At some point, a business may benefit from a purchasing economies, so the rise will no longer be proportional

Graph showing total variable costs, with cost ($) on the vertical axis and output level on the horizontal axis. An upward-slanting red line indicates increasing costs as output level increases.

Total costs

Graph showing cost analysis with three lines: fixed cost (horizontal), variable cost (upward sloping) and total cost (also upward sloping but above variable cost).

  • Total costs is the combination of all fixed and variable costs involved in producing a certain level of output

  • Total costs cannot be zero, as all organisations have some level of fixed costs

Direct and indirect costs

  • Direct costs are related to the production of a particular product and vary directly with output

    • Examples include raw materials, components and packaging

  • Indirect costs cannot be allocated easily to the production of a particular product

    • They relate to the business as a whole and are often called overheads

    • Examples include administration costs, salaries and rental fees

Two chocolate bar wrappers illustrate direct costs (milk, sugar, cocoa, nuts, packaging) and indirect costs (advertising, salaries, distribution).
Examples of direct and indirect costs for a chocolate manufacturer

Using cost information to make decisions

  • Cost data helps businesses make key decisions

Total costs (TC)

  • Total costs information can be used to assess how much money is needed to produce at a certain level and is vital for budgeting and cash flow forecasting

Worked Example

Logo of SupaJuice featuring a glass with orange juice, a green straw, and a leaf, alongside the brand name in bold green letters.

SupaJuice produces 12,400 bottles of its premium fruit juice drink each month.

  • It incurs monthly fixed costs (e.g. rent, salaries) of $25,700

  • Variable costs per unit (e.g. bottles, fruit) of $1.24

Calculate the business's annual total costs.

(3)

Step 1: Calculate monthly variable costs

equals space 12 comma 400 space cross times space $ 1.24 equals space $ 15 comma 376 (1)

Step 2: Calculate monthly total costs

equals space $ 15 comma 376 space plus space $ 25 comma 700 equals space $ 41 comma 076 (1)

Step 3: Calculate annual total costs

equals space $ 41 comma 076 space cross times space 12 space months equals space $ 492 comma 912 (1)

Average costs (AC)

  • Average cost is the cost of producing one unit of output, calcualted using the formula

Average space cost space equals space Total space cost space divided by space Quantity space of space output

  • The average cost helps a businesses set prices that cover costs and leave room for profit

  • It is also used to compare efficiency over time or between different products

Worked Example

Supajuice has been approached by a large supermarket chain that wants to buy a large volume of its juice each month. The supermarket chain is willing to pay $2.95 for each bottle.

Explain whether SupaJuice should accept the supermarket's offer.

(3)

Step 1: Calculate the average cost of producing each bottle

equals space Monthly space total space cost space divided by space Monthly space output equals $ 41 comma 076 space divided by space 12 comma 400 space bottles equals space $ 3.31 (1)

Step 2: State your answer and give a reason

  • SupaJuice should not accept the supermarket's offer (1), as it would make a loss of $0.36 ($2.95 - $3.31) on each bottle (1)

Marginal cost (MC)

  • Marginal cost is the cost of producing one extra unit of output, calculated using the formula

Marginal space cost space equals space Change space in space total space cost space divided by space Change space in space quantity

  • The marginal cost helps a business decide whether producing extra units is profitable

  • It is a key consideration for decisions about increasing production, pricing, and entering new markets

  • It can also be used for special order pricing and decisions about increasing output

Worked Example

SupaJuice is considering increasing its output from 12,400 to 13,000 bottles per month. This will increase monthly total costs by $9,450.

Explain whether SupaJuice should increase its output if it sells each bottle of juice for $4.75.

Step 1: Calculate the marginal cost

equals space $ 2 comma 750 space divided by space 600 space bottles equals space $ 4.58 (1)

Step 2: State your answer and give a reason

  • SupaJuice should increase output (1), as the marginal cost is $0.17 ($4.75 - $4.58) less than the selling price, allowing a profit to be made on each bottle sold (1)

Using cost information to make pricing decisions

  • Cost information can help shape a business’s entire pricing strategy, including how to respond to competition, customer demand and market conditions

Cost information and pricing decisions

Setting a minimum price point

  • Accurate cost data ensures prices are set above total or marginal cost

  • This prevents selling at a loss and is especially important for new products where cost estimates may change as production increases

    • E.g. A small electronics company launching a smart speaker knows its unit cost is $40 and avoids pricing below that, even during a promotion

Choosing between pricing strategies

  • Businesses choose strategies like penetration pricing, skimming, or competitive pricing

  • Cost information helps assess whether these options are financially sustainable

Adjusting prices when costs change

  • When input costs, such as raw materials or wages, rise, cost data helps decide whether to increase prices or reduce other costs while keeping prices stable

Responding to competitors' prices

  • Cost information helps businesses know how low they can reduce prices in response to rivals without making a loss

  • This is essential in price wars or competitive markets

Planning discounts and promotions

  • Even during sales or promotions, businesses must at least cover variable costs

  • Accurate cost information prevents making a loss as a result of short-term discounts

Using cost information to monitor and improve business performance

  • Cost information is a vital tool for monitoring business performance

  • It helps businesses

    • Track profitability

    • Set and measure performance targets

    • Identify problems early

    • Make better decisions for the future

    • Become more efficient and competitive

Uses of cost information in relation to business performance

Use

Explanation

Calculate and monitor profits

  • Businesses use cost data to calculate gross profit and net profit, and then compare them over time or between products.

  • This shows how well the business is performing financially

Calculate profit margins

  • Calculating gross profit margin and net profit margin helps measure profitability as a percentage of sales

  • This is useful for comparing performance between departments, products or time periods

Set performance targets

  • Managers use cost and profit data to set targets for departments or teams, e.g. reduce costs by 5% or improve profit margins

  • These targets help guide decision-making and performance management.

Identify areas of inefficiency

  • By comparing actual costs with budgeted costs, businesses can spot where they are overspending or wasting resources

Support decision-making and planning

  • Cost data helps businesses decide whether to launch new products, enter new markets or increase production

  • If predicted costs are too high, plans may be revised or cancelled

Reduce waste and improve efficiency

  • Cost analysis can highlight areas of waste in labour, materials or energy

  • This helps improve efficiency and lower costs over time

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.