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9609 · 5.4.3

Uses of cost information — practice questions

Practice and worked examples for 9609 Uses of cost information. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

A café sells coffee for $4. Variable cost per cup is $1.20. Fixed costs are $3,600/month. Budgeted sales 4,000 cups; actual sales 3,200 cups. Actual variable costs total $4,000.

Explain two uses of this cost information for the manager.

Show solution outline

1. Pricing / break-even Contribution per cup = 4−4 − 1.20 = $2.80. Break-even = $3,600 ÷ $2.80 ≈ 1,286 cups. The manager knows the minimum sales needed and can judge whether the $4 price is viable.

2. Cost control (variance) Budgeted VC for 3,200 cups = 3,200 × 1.20=1.20 = 3,840. Actual VC = $4,000 → adverse variance of $160. The manager should investigate the cause (e.g., waste, supplier price increases, incorrect portion sizes).

Also: actual sales were below budget, leading to lower total contribution. This may prompt a review of marketing or cost structures.

Worked example 2

ComponentCo needs 10,000 units of 'Part X' annually for its production line. The internal cost to produce one unit is: Direct Materials $5, Direct Labour $8, Variable Overheads $2, Allocated Fixed Overheads $4. An external supplier offers to provide the 10,000 units for $16 per unit. If ComponentCo stops making Part X, $15,000 of its total fixed overheads can be avoided. Should ComponentCo make or buy Part X?

Show solution outline

To make this decision, we must compare the relevant cost of making the part with the cost of buying it.

Step 1: Calculate the total relevant cost to MAKE Relevant costs are those that will be incurred only if the company continues to make the part. Unavoidable fixed costs are ignored.

  • Direct Materials: 10,000 units × 5=5 = 50,000
  • Direct Labour: 10,000 units × 8=8 = 80,000
  • Variable Overheads: 10,000 units × 2=2 = 20,000
  • Avoidable Fixed Overheads: 15,00015,000
  • Total Relevant Cost to Make: 50,000+50,000 + 80,000 + 20,000+20,000 + 15,000 = **165,000∗∗165,000**

Step 2: Calculate the total cost to BUY

  • Purchase Price: 10,000 units × 16=∗∗16 = **160,000**

Step 3: Compare and Decide

  • Cost to Make: 165,000165,000
  • Cost to Buy: 160,000160,000

Conclusion: The cost to buy (160,000)is160,000) is 5,000 less than the relevant cost to make ($165,000). Based on this financial analysis, ComponentCo should buy Part X from the external supplier.

Evaluation: The decision should also consider non-financial factors: supplier quality and reliability, loss of control over production, impact on employee morale due to potential redundancies, and the opportunity cost of the freed-up capacity (i.e., could the factory space be used for something more profitable?).

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