In simple terms
A friendly intro before the formal notes — no formulas yet.
Uses of cost information
9609 AS — how cost data supports pricing, profit analysis, cost control, and strategic decisions.
- 1
Make-or-buy: Compare relevant internal cost with external quote; ignore sunk costs.
- 2
Close or continue: If contribution is negative and no strategic reason to stay, consider closure.
- 3
Capacity: Rank uses of scarce resources by contribution per limiting factor.
Explore the concept
Use the live diagram and synced steps — play it or tap a step card to walk through.
Full topic notes
Formal explanation with the rigour you need for the exam.
Pricing decisions
Cost data sets a floor price. In the short run, price must at least cover variable costs to earn contribution. In the long run, price must cover full costs plus profit.
Cost-plus pricing adds a markup to unit cost. Contribution-based pricing starts from market price and checks whether contribution is sufficient — common when demand is price-sensitive.
When evaluating pricing in a case, combine cost floor with marketing (elasticity, competition, brand). Cost alone does not set the optimal price.
Profit measurement and product analysis
Cost information shows profit by product, department, or region. Managers can drop unprofitable lines, promote high-contribution products, or renegotiate suppliers. Customer profitability analysis links revenue and cost to each segment.
Cost control and budgeting
Comparing actual vs budget costs highlights variances — favourable (spent less) or adverse (spent more). Investigation may reveal waste, inefficiency, or external price rises. Links forward to 5.5 budgets and variances.
Make-or-buy: Compare relevant internal cost with external quote; ignore sunk costs.
Close or continue: If contribution is negative and no strategic reason to stay, consider closure.
Capacity: Rank uses of scarce resources by contribution per limiting factor.
Make-or-Buy Decisions
Another critical use of cost data is in outsourcing decisions. A business must compare the relevant costs of producing a component in-house against the price quoted by an external supplier. Relevant costs are future costs that differ between the alternatives. Sunk costs and unavoidable fixed costs are ignored.
Limitations
Cost information is historical and may not reflect future conditions. Overhead allocation can distort product profitability. Non-financial factors (quality, brand, staff morale) are excluded from cost accounts but matter in real decisions.
Worked examples
See the formulas applied — reveal one step at a time, like the exam.
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.
- 1
1. Pricing / break-even Contribution per cup = 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.
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?
- 1
To make this decision, we must compare the relevant cost of making the part with the cost of buying it.
How it all connects
The big idea sits in the middle — tap a linked idea to explore the link.
Tap a linked idea to see how it connects back to the main topic — that connection is what examiners reward.
Glossary
Try to recall each definition before you reveal it.
Quick check
Answer in your head first — then tap to check. No pressure.
Revision flashcards
Flip the card. Test yourself before the exam.
How does cost data help pricing?
Sets minimum price (cover VC or full cost depending on horizon); supports cost-plus and contribution-based pricing.
Key takeaways
Review these before you close the topic — retrieval beats re-reading.
- ✓
Make-or-buy: Compare relevant internal cost with external quote; ignore sunk costs.
- ✓
Close or continue: If contribution is negative and no strategic reason to stay, consider closure.
- ✓
Capacity: Rank uses of scarce resources by contribution per limiting factor.
Practice — then mark it
The whole point: a real Cambridge question, marked mark-by-mark.
Mark a cost uses question
Mark a cost uses question
Extra simulations & links
PhET, GeoGebra and other curated tools — open in a new tab.
Frequently asked
Checkpoint
One marked question is worth ten re-reads — close the loop before you move on.
Reading it isn’t knowing it — prove it.
Before you move on: do Mark a cost uses question on paper, snap a photo, and get examiner-style feedback on exactly where you win and lose marks.