5.4 Costs — AS Level Business (9609)

2026 Syllabus Objectives

By the end of this topic, you should be able to:

Explain the need for accurate cost information
Identify and explain different types of costs: fixed, variable, direct, and indirect
Explain the differences between full costing and contribution costing
Describe the uses and limitations of full costing
Explain the nature of contribution costing
Explain the difference between contribution and profit
Describe the limitations of contribution costing
Identify situations where contribution costing would and would not be used
Use cost information for decision-making: average, marginal, and total costs
Explain how costs are used for pricing decisions
Explain how costs are used to monitor and improve business performance, including calculating profit
Apply contribution costing to special order decisions
Explain the meaning and importance of break-even analysis
Calculate and interpret break-even output, contribution, margin of safety, and level of profit — in both numeric and graphic form
Describe the uses and limitations of break-even analysis

Cost information means data about all the money a business spends to produce and sell its products or services.

For a business to run successfully, it needs to know its costs as accurately as possible. Here is why:

To set prices correctly — If a business underestimates its costs, it may price its product too low and end up selling at a loss. If it overestimates, it may price too high and lose customers.
To calculate profit — Profit = Revenue − Costs. Without knowing costs accurately, a business cannot measure whether it is actually making money.
For decision-making — Managers rely on cost data to make choices such as whether to launch a new product, change a supplier, or continue producing a certain item.
To carry out break-even analysis — Break-even analysis (covered later) tells a business how many units it must sell to cover all its costs. This analysis is only useful if the cost data going into it is accurate.
To control spending — By comparing what they actually spent against what they planned to spend (a budget), businesses can spot where money is being wasted and take action.