A Level Business: Costs and Budgets (Cambridge 9609) – Revision Notes

These notes condense sections 5.4 Costs and 5.5 Budgets of the Cambridge International AS & A Level Business 9609 syllabus for examination in 2026, 2027 and 2028. Both sections are AS Level content in Topic 5, which A Level candidates also study. For fuller explanations, use the study guide, then test yourself with the practice questions. Course links: the Cambridge A Level Business hub, the checklist and the free diagnostics. The businesses here are invented.

Definitions to know

Term	Meaning
Fixed cost	Stays the same whatever the output, over the short run (rent, insurance)
Variable cost	Changes with output (ingredients, packaging)
Direct cost	Can be traced to a product or cost centre
Indirect cost	Cannot be traced to one product; shared (overheads)
Total cost	Fixed costs + variable costs
Average cost	Total cost ÷ output
Marginal cost	Extra cost of one more unit
Contribution	Selling price − variable cost (per unit), or total revenue − total variable costs
Margin of safety	How far actual (or forecast) output is above break-even output
Budget	Financial plan with targets for a future period
Variance	Actual figure compared with budgeted figure

The syllabus gives no formulas for 5.4 and 5.5. The ones below are the standard forms.

Formulas

Item	Standard form
Total cost	Total fixed costs + (variable cost per unit × output)
Average cost	Total cost ÷ output
Contribution per unit	Selling price less variable cost for one unit
Total contribution	Units sold × contribution per unit
Profit	Total contribution − fixed costs (or revenue − total costs)
Break-even output	Fixed costs ÷ contribution per unit
Output for target profit	Fixed costs plus target profit, divided by contribution per unit
Margin of safety (units)	Actual output less break-even output
Margin of safety, per cent	Margin of safety as a share of actual output, × 100
Cost-plus price	Unit cost × (1 + mark-up as a decimal)
Variance	Budgeted figure compared with actual figure, labelled adverse or favourable

Costing: full versus contribution

	Full costing	Contribution costing
Fixed costs	Shared across products (apportioned)	Not shared; deducted in total
Key figure	Profit per unit	Contribution per unit
Best for	Cost-plus pricing, full picture of profitability	Short-term, one-off decisions such as special orders
Main limitation	The overhead basis is a judgement	Ignores fixed costs, so it can hide long-run losses

Contribution is not profit. Contribution pays towards fixed costs; profit is what is left after them.

Method: full costing in steps

1. Add up all overheads.
2. Choose a basis (for example, labour hours) and total it across products.
3. Overhead rate = overheads ÷ total basis.
4. Overhead per unit = rate × units of the basis used per unit.
5. Full cost per unit = variable cost + overhead per unit.

Uses of cost information

• Decisions: compare average and marginal cost; if marginal cost is below price, an extra unit adds to profit.
• Pricing: cost-plus adds a mark-up. A floor price in the short run is marginal (variable) cost.
• Monitoring: compare actual unit cost with target to spot waste. Profit = revenue − total costs.
• Special orders: accept if the price is above variable cost, spare capacity exists and fixed costs do not rise, then check non-financial factors.

Worked reminder. Talgarth Tea Rooms gets a one-off order for 200 afternoon teas at £6.50. Variable cost is £4.00 a tea. Contribution = £2.50 × 200 = £500. Accept financially, but ask whether regular customers will expect the same price.

Break-even in steps

Talgarth Tea Rooms sells afternoon teas at £9, with variable cost of £4 and fixed costs of £12,000 a month.

1. Contribution per tea = £9 − £4 = £5.
2. Break-even = £12,000 ÷ £5 = 2,400 teas (revenue £21,600).
3. Actual sales 2,900 teas, so margin of safety = 500 teas (17.2% of actual).
4. Profit = 2,900 × £5 − £12,000 = £2,500.
5. Target profit £3,000 needs (£12,000 + £3,000) ÷ £5 = 3,000 teas.

The chart in brief

Horizontal axis: output. Vertical axis: money. Lines: fixed costs (flat), total costs (start at the fixed cost level, upward sloping), revenue (starts at origin, steeper). Break-even is where revenue and total costs cross. Margin of safety is the gap along the output axis between break-even and actual output. A higher price steepens the revenue line, so break-even moves left. Higher fixed costs raise the cost lines, so break-even moves right.

Uses and limitations

Uses	Limitations
Shows minimum sales needed	Assumes all output is sold
Easy to draw and explain	Assumes constant price and unit variable cost
Helps with loan applications and planning	Fixed costs may step up
Tests what-if changes	Based on forecasts; one product only

Budgets

• Purposes: measure performance, allocate resources, control and monitor.
• Benefits: clear targets, coordination, motivation, early warning.
• Drawbacks: time-consuming, forecast errors, short-term focus, can be rigid.

Type	How it works	Strength	Weakness
Incremental	Last period plus or minus a percentage	Quick and simple	Repeats old inefficiency
Flexible	Variable items adjusted to actual output	Fairer comparison	More work; needs cost behaviour known
Zero	Start from £0 and justify every item	Challenges all spending	Slow and costly

Variances in steps

1. For revenue: actual above budget is favourable; below is adverse.
2. For costs: actual below budget is favourable; above is adverse.
3. State the amount and the label (£1,400 favourable).
4. If output changed, flex the variable costs first.
5. Suggest causes and what the manager should do.

Worked reminder: Talgarth budgets for 2,000 covers and £8,000 of food. Food is £4 a cover. Actual covers are 2,400, so the flexed food budget is £9,600. Actual food spend of £9,900 is a £300 adverse variance, not a favourable one against £8,000.

Must-know distinctions

• Fixed versus indirect: fixed concerns behaviour with output; indirect concerns traceability.
• Variable versus direct: a cost can be direct and fixed, or indirect and variable.
• Contribution versus profit: fixed costs separate them.
• Margin of safety versus break-even: one is the buffer above the other.
• Adverse versus favourable: judged by effect on profit, not whether the number is bigger.

Applying it in a case study

Numbers alone earn little in a case study. After a calculation, say what it means for this business: a thin margin of safety means a small fall in demand creates a loss. For an evaluate or justify question, weigh both sides, then reach a judgement that depends on the facts given, such as whether spare capacity exists or whether the firm’s cost data are reliable.

Quick self-test

1. Talgarth Tea Rooms has fixed costs of £4,000 a month and a variable cost of £2.50 a cover. Find total cost and average cost for 1,200 covers.
2. Define marginal cost.
3. Price £9, variable cost £4, fixed costs £12,000. Find break-even output.
4. Actual output is 2,900 and break-even is 2,400. Find the margin of safety as a share of actual output, in per cent to 1 d.p.
5. How many units give a profit of £3,000 under the figures in question 3?
6. Unit cost is £30 and the mark-up is 25%. Find the price.
7. Budgeted sales revenue is £15,000 and actual is £16,400. State the variance.
8. Budget: 2,000 covers and £8,000 of food. Flex the food budget for 2,400 covers.
9. Name one limitation of contribution costing.
10. Fixed costs rise to £13,500 (other figures as in question 3). Find new break-even output.

Answers

1. Total cost = £4,000 + 1,200 × £2.50 = £7,000. Average cost = £7,000 ÷ 1,200 = £5.83.
2. The extra cost of producing one more unit.
3. £12,000 ÷ £5 = 2,400 units.
4. 500 ÷ 2,900 = 17.2%.
5. (£12,000 + £3,000) ÷ £5 = 3,000 units.
6. £30 × 1.25 = £37.50.
7. £1,400 favourable.
8. £8,000 ÷ 2,000 = £4 a cover; £4 × 2,400 = £9,600.
9. It ignores fixed costs, so prices set on contribution alone may not cover overheads over time (or it relies on a clear fixed/variable split).
10. £13,500 ÷ £5 = 2,700 units.

Where marks are usually lost

• Writing break-even as fixed costs ÷ price instead of ÷ contribution.
• Not rounding break-even output sensibly when it is not a whole number.
• Calling contribution “profit”.
• Giving a variance with no adverse or favourable label.
• Comparing actual costs with an unflexed budget after output has changed.
• Describing a break-even assumption with no link to the case (apply it to the business).
• Listing benefits of budgets without any drawbacks when asked to evaluate.
• Accepting a special order on the numbers alone with no mention of non-financial factors.

Frequently asked questions

How do you calculate break-even output? Divide fixed costs by contribution per unit, where contribution per unit is the selling price minus the variable cost per unit. The Cambridge 9609 syllabus gives no formulas for 5.4 and 5.5, so this is the standard form.

What is the difference between contribution and profit? Contribution is selling price minus variable cost; it goes towards paying fixed costs. Profit is what is left after the fixed costs have been covered.

What is the difference between incremental, flexible and zero budgeting? Incremental budgeting adds or subtracts a percentage from last period’s budget. Flexible budgeting adjusts variable items to actual output. Zero budgeting starts from nothing and every item must be justified.

Can a cost be both fixed and direct? Yes. Fixed and variable describe how a cost behaves as output changes, while direct and indirect describe whether it can be traced to one product, so the two classifications overlap.

Official syllabus

Cambridge International AS & A Level Business 9609 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International), sections 5.4 and 5.5.