Accounting and Finance

OCR Business Studies for AS
20
Unit
Budgets and decision-making
Revision questions
(67 marks; 70 minutes)
1 Explain the meaning of the term budgeting. (2)
● A process of setting targets for costs and revenues for a future time period.
2 List three advantages that a budgeting system brings to a company. (3)
● Helps prevent over-spending
● Provides a yardstick against which performance can be measured
● Allows spending power to be delegated.
3 Why is it valuable to have a yardstick against which performance can be measured? (3)
● Exceeding targets can bring motivation through a sense of achievement, while failure to meet
targets allows corrective measures to be taken in the future.
4 What are the advantages of a zero-based budgeting system? (3)
● Carefully constructing justification for every pound to be included in the proposed budget takes
up much time for budget holders, while checking the accuracy of budget holders’ demands takes
up more management time that could be spent doing other things.
5 Briefly explain how most companies actually set next year’s budgets. (3)
● They take last year’s budget and adjust it slightly, perhaps adding a little to allow for inflation.
6 Why should budget holders have a say in the setting of their budgets? (4)
● People will be more committed to reaching a target they believe can be met.
● Budget holders are on the spot and may have particular knowledge of their area that is not avail-
able at head office level.
© Hodder Education 2008

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Unit
7 Complete the budget statement by filling in the gaps. (8)
January February March April

Income 4200 4500 4000 4000
Variable costs 1800 2000 2000 1800
Fixed costs 1200 1600 2100 1600
Total costs 3000 3600 4100 3400
Profit 1200 900 (100) 600
Answers in bold.
8 Amend the budget statement completed in question 7 to show the income levels needed to gen-
erate a profit of £1000 per month, assuming there is no change in costs. (4)
January February March April

Income 4000 4600 5100 4400
Variable costs 1800 2000 2000 1800
Fixed costs 1200 1600 2100 1600
Total costs 3000 3600 4100 3400
Profit 1000 1000 1000 1000
Answers in bold.
9 What are the two main advantages that using a budgeting system brings to a company? (2)
● Allows the delegation of spending power.
● Can be used to monitor performance.
10 Why is it valuable to have a yardstick against which performance can be measured? (3)
● Exceeding targets can bring motivation through a sense of achievement, while failure to meet
targets allows corrective measures to be taken in the future.
11 How might a firm respond to an increasingly adverse variance in labour costs? (4)
● Find ways to reduce the variance. This could involve imposing greater controls on labour costs,
reducing staffing levels or overtime rates. It may also wish to check the viability of the budgeted
figure.
12 Explain what is meant by a ‘favourable cost variance’. (2)
● The actual costs for a time period are lower than the budgeted costs for that period.

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13 Why is management by exception a useful time-saving measure for management? (4)
● It allows busy managers to focus their time only on problem areas and really successful areas,
looking for causes of variances. This can allow them to learn lessons that can be spread
throughout the organisation. It negates the need to look carefully at every budget.
14 Explain two drawbacks of budgeting. (4)
● Setting and monitoring budgets takes up management time that carries an opportunity cost.
● Targets can be unrealistic, and therefore demotivate budget holders.
● Budgeting may encourage short-term decisions, taken solely to hit targets, which may actually
be harmful in the long term.
15 Briefly explain why a shop with a favourable income variance might expect some cost variances to
be adverse. (4)
● Selling more is likely to push up costs, such as stock and staffing levels if the shop is busier than
expected.
16 Look at the table, then answer the questions that follow:
(a)
● May – budgeted profit ⫽ £1300
● May – actual profit ⫽ £1100
● June – budgeted profit ⫽ £1500
● June – actual profit ⫽ £1600 (4)
(b)
(i) June
(ii) May
(iii) June
(iv) June
(v) June
(vi) May

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Unit
(vii) May
(viii) May
(ix) May
(x) June (10)
Revision exercises
B1 Data response
(Refer to questions on page 139 of the textbook.)
1 Complete the budget statement by filling in the gaps. (4)
Jan–Mar Apr–Jun Jul–Sep Oct–Dec

Shop sales 200 3000 5000 2000
Lake fees received 0 22000 25000 2800
Stock 2500 1000 2500 1000
Wages 1000 5000 5000 1000
Overheads 1000 4000 6000 4000
Profit (4300) 15000 16500 (1200)
Answers in bold.
2 Adjust the budget to show the effect of a 50% increase in shop sales in the third quarter and a 25%
increase in wages in quarter 4. (4)
Jan–Mar Apr–Jun Jul–Sep Oct–Dec
Shop sales 200 3000 7500 2000
Lake fees received 0 22000 25000 2800
Stock 2500 1000 2500 1000
Wages 1000 5000 5000 1250
Overheads 1000 4000 6000 4000
Profit (4300) 15000 19000 (1450)
Answers in bold.

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Unit
3 Explain why a budgeting system might help KB Watersports to:
(a) control expenses (6)
● Budgeting will help to keep a close eye on the wages budget when sorting out staffing rotas,
and avoid over-staffing.
● Setting targets for shop sales should help to avoid over-stocking the shop, thus tying up
more working capital than is necessary.
(b) motivate staff. (6)
● Shop staff may be motivated to try to hit their sales targets.
● All staff may be committed to keeping overheads low and may therefore see the need to keep
wastage to a minimum.
4 To what extent is budget-setting a crucial element of a successful small business start-up such as
KB Watersports? (10)
It is a crucial element, because:
● start-ups always seem short of cash, and budgeting may help monitor and control cash flows
more carefully
● the entrepreneurs will find it hard to decide whether they are performing successfully without
any targets against which success can be measured; as Kurt and Brian may lack experience of
running their own business, this could be very helpful.
It is not, because:
● for a start-up, estimates may be so far off as to be useless; there is no mention that Kurt and Brian
have relevant business experience that would help them to set realistic budgets
● setting budgets could take Kurt and Brian away from more important tasks such as customer
service and brand building.
Overall, in this case, a simple budgeting system, which should avoid taking up too much manage-
ment time, would bring benefits. However, Kurt and Brian may need to adjust the budgets
regularly in the early stages of the business as they develop a feeling for exactly where their targets
should be set.
10 marks
Level 4 Evaluation and judgement of information in context (10-9)

Level 3 Analysis of information in context (8-7)
Level 2 Application of knowledge in context (6-4)
Level 1 Knowledge and understanding of business concepts (3-1)
20
Unit
B2 Data response
(Refer to page 140 of the textbook. Please note that there are a limited number of copies of the student
book in which the questions for this activity are incorrect. The correct questions appear below.)
1 Identify and explain three pieces of evidence from the text that demonstrate the problems for firms
that operate without a budget. (9)
Up to 3 marks per point.
● Over 40% feel they can spend what they want. The lack of a budget does nothing to breed a
culture of cost control – this hits the bottom line.
● 88% aren’t influenced by cost. It is therefore obvious that they will be influenced by other factors,
such as luxury, which drive up overheads.
● £1.3 billion that doesn’t need to be spent is £1.3 billion of lost profit that firms could use more
productively and profitably.
2 Explain how a small business might benefit from setting expenditure budgets for its business travel.
(5)
● No unexpected surprises when expense claims are handed in; makes financial control easier.
● Can still empower staff to choose own arrangements, just set an upper limit. This may minimise
the annoyance for staff used to ‘making their own arrangements’.
● Money tends to be tighter in smaller firms.
3 Outline two problems a business might have in setting a travel budget. (6)
● Unpredictability of the need for many trips. Much business travel may be made in order to grab
an opportunity while you can – frequently an unexpected opportunity.
● Changes in costs charged by airlines, hotels and rail companies may be dramatic and unpre-
dictable.
6 marks


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Unit
Revision exercises
B3 Data analysis
1 What are the five numbers missing from the variance analysis? (5)
January February
B A V B A V
Sales revenue 140 150 10 180 175 (5)
Materials 70 80 (10) 90 95 (5)
Other direct costs 30 35 (5) 40 40 0
Overheads 20 20 0 25 22 3
Profit 20 15 (5) 25 18 (7)
Answers in bold.
2 Examine one financial strength and two weaknesses in this data, from the company’s
viewpoint. (9)
Strength:
● good overhead control – January saw zero variance and February saw a favourable variance.
Weaknesses:
● adverse raw materials variance in February – if sales were lower than expected, it may be con-
sidered a surprise that it spent more, not less, on materials, unless the lower revenue figure was
due to a steep price cut that boosted the volume, but not the value, of sales; adverse profit
variances in both months are a key initial indicator of possible problems with general financial
control.
3 How might a manager set about improving the accuracy of a sales budget? (6)
● More or better market research.
● Look more closely at past trends and patterns.
● Consult more fully with local manager.

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Unit
6 marks

B4 Data response
1 Use the data to explain why February’s profits were worse than expected. (5)
● Sales revenue was worse than expected, by 13%.
● Overheads were higher than budgeted.
● Although variable costs were lower than budgeted (materials by 8%, others by 10%), the pro-
portional fall in sales revenue was greater than that of costs.
● Therefore profit was reduced.
2 Why might Clinton & Collins Ltd have chosen to set monthly budgets? (5)
1 mark per point identified up to a maximum of 3, plus up to 2 marks for explanation.
● Prevents over-spending by giving managers targets within which to stick.
● Provides a yardstick against which to measure performance, giving staff a chance to work
towards a measurable objective.
● Allows delegation of spending power, increasing motivation of budget holders as they feel
empowered.
3 Explain how the firm might have set these budgets. (4)
1 mark per point identified, second mark for brief explanation.
● Based on last year’s figures, perhaps adjusted by the plans for the coming period.
● Zero-based budgeting, expecting budget holders to justify every pound allocated.

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Unit
4 The directors of Clinton & Collins Ltd knew that the recession was causing problems for the firm
but were unsure as to whether things were improving or worsening. To what extent does the data
suggest an improvement? (11)
Month Sales variance Profit variance

January (16) (10)
February (24) (16)
March (40) (38)
April (52) (48)
● The variances are getting worse as time goes by – suggesting something other than the recession.
● Lack of economic data prevents certainty since the recession may be deepening.
● The rate of worsening seems to be slowing.
● Overall, the chances are that problems appear to be down to more than just the recession.

21
Unit
Cash flow forecasting
Revision questions
1 What is meant by ‘cash flow’? (2)
● Cash flow is the flow of money into and out of the business in a given time period.
● Businesses need to ensure they have sufficient money coming into the business to pay for any
debts as they become due. Cash flow problems can result in suppliers stopping supplies.
Creditors may also take a business to court to claim unpaid money. More positively, it is also
important to know when surplus cash is to be generated by the business, enabling expansion to
take place.
2 What is a cash flow forecast? (3)
● A cash flow forecast shows the expected future flow of money into and out of the business. The
flows are normally shown on a monthly basis.
3 Explain two limitations of cash flow forecasts. (4)
● They rely on estimates and are only as good as the figures they are based on. Estimates of sales
or costs may be wrong. Timing of cash receipts or expenditure may be incorrect.
4 Give two reasons why a bank manager might want to see a cash flow forecast before giving a loan
to a new business. (2)
Possible answers include:
● To ensure that it has sufficient funds to pay for its expected expenditure.
● To see how much finance it is likely to need.
● To see how long it is likely to need the finance for.
● To ensure the business has sufficient funds to pay interest on the loan and repay the capital.
● To be sure the business is aware of the importance of good cash flow management.
5 How might a firm benefit from delaying its cash outflows? (3)
● Cash stays in the business longer so it may avoid the need for borrowing.
● It can ensure that sufficient funds are available to pay other creditors.

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Unit
● It may earn interest on the retained cash.
6 What problems might a business face if its cash flow forecast proved unreliable? (3)
● The net cash flow would be different to expected. If it was lower than expected this could cause
cash flow problems.
7 How might a firm benefit from constructing its cash flow forecasts on a computer spreadsheet? (4)
● May be less time consuming in the long term.
● Less chance of records being lost.
● Records can be backed up.
● Information can be easily sent back and forth.
● Easier to do variance analysis.
8 Why is it especially hard for a first-time entrepreneur to produce an accurate cash flow
forecast? (3)
● It is difficult to predict cash inflows before trading starts.
● Cash outflows are rarely as expected.
9 Why is cash flow an especially important topic for small firms rather than large ones? (4)
● Because it is harder for them than it is for large firms to negotiate longer credit terms or an over-
draft, so they need to remain in the black.
10 Outline the probable cash cycle for a small sandwich shop. (4)
● Buy in ingredients and pay fixed costs. Then they can start trading, at which point they can start
getting cash in.
11 Explain why ‘good management of cash flow starts with good forecasting’. (3)
● In order to manage cash flow well, it is vital to accurately forecast the cash flow data. If the pre-
dicted cash inflows and outflows are not accurate, a business will not know its cash flow needs.
12 Outline two problems that might arise if a firm is operating with very poor cash flow. (4)
● Inability to pay suppliers may lead to strained relationships.

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Unit
● Charges may be incurred for going overdrawn.
● They may be unable to pay loan payments which would also lead to charges.
● They may be unable to actually buy suppliers which would prevent them from trading.
13 Why might a business be unable to get a loan or overdraft if it has cash flow difficulties? (4)
● The bank may be unwilling to give it a loan/overdraft as it would be concerned about the busi-
ness’s ability to pay it back.
14 What impact does the length of the business process have on cash flow? (4)
● The longer the business process, the more cash inflows will be delayed which will have a nega-
tive impact on cash flow.
15 Getting money in from customers is a vital part of cash flow management. Outline two things a
firm can do to ensure that cash is collected efficiently. (4)
● Collect references from customers.
● Write to debtors demanding payment after 30 days.
● Offer cash discounts to ensure money doesn’t have to be collected.
16 How might a small producer of shelf fittings benefit from factoring? (4)
● Get the cash now.
● Guarantee the money is collected.
● Improve cash flow position.
17 Outline three ways in which a business can improve its cash flow situation. (6)
● Collect payments from debtors.
● Delay payments to creditors.
● Get a loan from the bank.
● Factoring.

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Unit
18 What internal factors could affect a firm’s cash flow? (3)
● Management ability to accurately forecast cash flow.
● Mistakes made by staff could worsen a firm’s cash flow position.
Revision exercises
B1 Data response
1 The company’s forecast cash position at the end of June: (18)
Jan Feb March April May June

Cash at start 40,000 (5,000) (9,000) (11,000) (11,000) (8,500)
Inflow 0 12,000 16,000 20,000 25,000 24,000
Outflow 45,000 16,000 18,000 20,000 22,500 22,000
Net cash flow (45,000) (4,000) (2,000) 0 2,500 2,000
Cumulative cash flow (5,000) (9,000) (11,000) (11,000) (8,500) (6,500)
2 The maximum level of overdraft the owners will need to negotiate with the bank before starting
up: (2)
● Maximum overdraft £11,000.
B2 Data response
1 Construct a cash flow forecast for the business for January to September. (10)
● (1) for loan (okay if included in opening balance)
● (2) sales

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Unit
● (1) for each expenditure line (5)
● (2) for correct closing balance or up to max
● (1) for correct technique but incorrect calculation.
2 Outline two significant features of this cash flow forecast: (6)
● (2) for identifying a shortage of cash in March and April
● (2) for explanation such as: ‘Merlin cannot continue with the development unless they solve the
problem.’
Use own figure rule if cash flow forecast was incorrect.
3 Discuss two possible courses of action. (8)
(1) for each suggestion plus up to (4 ) for discussion of each.
● Use an overdraft for the period of the cash shortfall. Provides additional cash. Flexible but
expensive.
● Negotiate larger initial loan. Makes additional cash available. Additional interest costs but pro-
vides a safety net.
● Sell the flats earlier. Brings in revenue earlier. May not be possible, depends on the market.
● Obtain longer credit for the materials. They will delay some expenditure. Depends on supplier
and credit rating of firm.
4 Examine two ways in which the cash flow forecast might be unreliable. (6)
● the figures used may prove to be wrong -sales may be lower than expected; the price of materials
or other production costs may be higher than expected
● the timing of cash inflows may be wrong – customers may not pay on time; creditors may
demand payment sooner than anticipated.

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B3 Data response
1 Explain two problems Sujugan may have had in drawing up this cash flow forecast for D&S. (6)
● predicting sales
● estimating cash outflows
6 marks

2 Complete the job for Sujugan by working out the missing figures a–t. (10)
a) £01,000
b) £94,000
c) £56,000
d) £7,000
e) (£15,000)
f) (£37,000)
g) £67,000
h) £44,000
i) (£7,000)
j) (6,000)
k) (£21,000)
l) (£58,000)
m) £9000

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n) £53,000
o) (£6,000)
p) (£21,000)
q) (£58,000)
r) £9,000
s) £53,000
t) £46,000
3 What would you recommend that Danielle and Sujagan do about this forecast? (9)
Explain the reasons behind your answer.
● arrange an overdraft of £60,000 for at least a 3-month period from September to November
● try to negotiate longer credit terms for September to December
● think about how to improve February sales (e.g. Valentines Day promotion).
Revision exercises
B4 Data response
1 What is meant by the term ‘credit crunch’? (2)
● Reduction in the availability of loans or an increase in the cost of obtaining loans.
2 Why are banks less willing to lend to small businesses? (6)
● Because they have less collateral so the risk is increased.
● Because they may not have confidence in the firm’s ability to repay the loan.

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Unit
3 What is the rate of interest that small businesses are likely to be paying? (2)
● 10–11%
4 On a £10,000 loan with an interest rate of 12%, how much will the interest charges be for the first
year of the loan? (4)
● £1,200
5 Why will a lack of available credit stop small businesses from expanding? (8)
● It will increase the cost of borrowing which will decrease a small firm’s ability/will to borrow
finance.
● Small businesses do not always have the level of profit required to expand using internal sources
so if they cannot get a loan, they are far less likely to expand.
● Small businesses are less likely to be able to raise finance through share capital so reduced avail-
ability of loans will reduce their ability to expand.
8 marks

6 Explain how a lack of easy credit for larger firms may affect smaller businesses. (8)
● As large businesses slow down expansion due to lack of finance, this will have a knock-on effect
on the small firms that rely on them to survive. For example, if Tesco slows down its expansion
it will also slow down its purchasing from small suppliers. The suppliers will suffer a fall in
demand which may have a knock-on effect on other small firms.
B5 Case study
1 What might be the reasons for the increase in the stock of finished goods and materials? (6)
● A reduction in sales would lead to an increase in stock.
● Overproduction.

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2 Consider what suggestions the production director might make. Explain your reasoning. (7)
● Introduce lean production in order to reduce costs.
● Reduce number of employees in production in order to reduce costs and quantity of production.
3 The finance director sees slow payment as his major problem. Examine the ways in which he could
tackle this problem. (6)
● Factoring.
● Demanding payment by letter or phone.
● Threatening legal action if necessary.
● Introducing cash discounts in order to prevent the problem from occurring in the future.
6 marks

4 Outline the contribution the marketing department might make to help improve the cash flow
situation. (6)
● Increase sales in order to improve cash in.
● If necessary reduce the price of the product in order to increase demand (as stock is piling up).
● Devise innovative and cost-effective marketing techniques to increase sales.
5 Apart from tackling the issue of slow payment, consider what other short-term measures the firm
might take to overcome the immediate cash crisis. (10)
● Get an overdraft so they can pay the debt.
● Speak to the firms they owe the £500,000 to and explain the situation and try to negotiate
delaying the payments further.

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Unit
Essay questions
1 Managing cash flow is vital for the future of any business. Discuss.
Suggested points:
● Managing cash flow involves controlling the flow of money in and out of a business, in order to
ensure that it can meet its financial commitments when it needs to.
● The consequences of failing to do so include refusal of suppliers to supply goods on credit (or at
all), withdrawal of overdraft facilities by the bank or missed sales opportunities with new or
existing customers – this is likely to have a negative impact on the business’ performance and
could ultimately lead to business failure.
● Consequences of failing to manage cash flow depend on the extent of the problem and how
easily it can be resolved – obviously a temporary problem is unlikely to have the same conse-
quences as an on-going cash-flow shortage.
● Small or new businesses may need to be particularly careful about managing cash flow as they
are unlikely to have the resources required to resolve a crisis – e.g. fixed assets that can be sold
off or used as collateral to secure bank loans.
Possible evaluation:
● Clearly, there is more to a successful business than an ability to manage cash flow effectively, e.g.
products that customers want to buy, appropriately skilled and motivated workers, etc. However,
effective cash flow management is the foundation upon which success is built – many profitable
firms fail as a result of not taking cash flow management seriously.
2 In periods of economic downturn it is even more important for a business to control cash flow. Do
you agree with this statement?
Suggested points:
● Economic downturn is likely to be characterised by rising unemployment, falling levels of con-

sumer and investment spending and increasing levels of bankruptcies – this is likely to mean
falling sales for businesses, reducing the level of cash inflow and forcing firms to try to reduce
cash outflows, sell assets, seek overdrafts.
● It may become more difficult to resolve cash flow problems, once they arise, as suppliers will be
more reluctant to offer generous credit terms and banks may be more reluctant to agree to over-
drafts and other lending, because of the increased risk of bankruptcy.
● Some firms may actually see a rise in sales during an economic downturn – e.g. discount retailers
such as Aldi and Lidl have become more popular as shoppers seek better value for money.

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● Cash flow management is not just an issue during periods of economic downturn – many firms
fail due to cash flow problems even when the economy is healthy and sales are growing.
● Controlling cash flow is vital at all times for any firm, as failure to do so could ultimately lead to
it going out of business altogether. The hostile trading conditions that exist during an economic
downturn highlight the importance of this.
3 To what extent do you agree with the following statement? ‘Managing cash flow is not just the busi-
ness of the finance department, it is the responsibility of everyone in the business.’
Suggested points:
● The activities of all employees generate costs which will need to be paid at some point, so
everyone within an organisation has a responsibility to keep these costs down. For example, a
production worker can reduce the amount of money that needs to be paid to suppliers by
reducing the amount of waste generated.
● Similarly all employees can help to generate increased cash inflows by producing products of
high quality, delivering excellent customer service, etc.
● However, cash flow management involves specific tasks such as agreeing credit terms with cus-
tomers and suppliers, chasing late payments, negotiating overdrafts, etc.
● In very small businesses, these tasks may be carried out by the owner but, as the business grows,
cash flow management is likely to be more effective if carried out by an individual (or depart-
ment) with specialist skills.
● While, officially, cash flow management is likely to be the specific responsibility of a firm’s
finance department, it is crucial that all employees are aware of the financial consequences of
their actions and the impact of these on overall performance.

22
Unit
Costing
Revision questions
1 Why might a business initially receive relatively low revenues from a product newly introduced to
the market? (3)
● Because it set a low price to penetrate the market.
● Because awareness of the product is poor.
● Because it hasn’t yet been able to build a customer base and doesn’t benefit from repeat purchase.
● Because output may be low.
● Because it may be unable to charge a high price at the start due to high PED.
2 State two circumstances in which a company may be able to charge high prices for a new
product. (2)
● If it has a strong USP.
● If it is the first into the market.
● If it is already a recognised brand – e.g. PS3.
3 For what reasons might a firm seek to maximise its sales revenue? (4)
● When variable costs are relatively low, so each additional unit sold adds few extra costs. In such
a case, maximising sales will, in effect, maximise profits.
4 If a business sells 4000 units of Brand X at £4 each and 2000 units of Brand Y at £3 each, what is
its total revenue? (4)
● X: 4000 units at £4 = £16,000
Y: 2000 units at £3 = £6,000
£16,000 + £6,000 = £22,000

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Unit
Costing
5 State two reasons why firms have to know the costs they incur in production. (2)
● to assess if it is profitable to sell goods to market at a given price
● to compare actual costs with forecast costs to check they are on target
● to decide on the selling price
● for the purpose of financial planning.
6 Distinguish, with the aid of examples, between fixed and variable costs. (4)
● Fixed costs are costs which do not change with output, e.g. rent, depreciation.
● Variable costs are costs which do change with output, e.g. raw materials, piece-rate labour.
7 Explain why fixed costs can alter only in the long term. (3)
● If output increases significantly in the long term, more managers could be needed, or another
factory or additional machinery. However, in the short term, fixed costs will not change unless
output alters massively.
8 How is the contribution of a product calculated? (2)
● Price – direct or variable cost = contribution per unit.
9 How is the profit of a product calculated? (2)
● Total revenue – total cost = profit
10 Give two reasons why profits are important to businesses. (2)
Possible reasons include:
● Profits are the primary objective for most businesses.
● They measure the success of the business.
● They are a source of capital.
● High profits act as a magnet to attract further investment.
● High profits keep shareholders happy.

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Unit
Costing
11 Outline one advantage and one disadvantage that may result from a business deciding to lower the
proportion of profits it distributes to its owners. (4)
● Advantage: more profit available to reinvest which may help fuel growth.
● Disadvantage: it may demotivate owners.
12 State two purposes for which a business’s profits might be used. (2)
● reinvestment
● payments to owners.
13 Explain two reasons why a business might calculate contribution rather than profit in order to
make a decision. (6)
● The business may be uncertain how to calculate the profit on a particular item if fixed overheads
haven’t been divided up effectively between different product lines.
● Contribution figures per unit can be more useful than profit per unit, because they are not dis-
torted by changes in fixed costs per unit when the volume of output changes.
14 To what extent is the calculation of contribution useful when deciding whether to take on a special
order? (10)
To what extent is the calculation of contribution useful when deciding whether to take on a special
order? (10)
● Special orders can be confusing to calculate, especially if they are based on average costs. The best
way is to calculate them purely on the basis of contribution per unit and then the total contri-
bution generated by the order.
● As fixed costs, by definition, are unchanged by the extra order, calculating the impact on contri-
bution will also tell you the change in profit, so calculating contribution isn’t just ‘useful’, it’s
essential.

22
Unit
Costing
Revision exercises
B1 Calculation practice questions

1 During the summer weeks, Devon Ice Cream has average sales of 4000 units a week. Each ice cream
sells for £1 and has variable costs of 25p. Fixed costs are £800.
(a) Calculate the total costs for the business in the summer weeks. (3)
● Total cost = FC + TVC
Total cost = £800 + (4000 x 25p)
Total cost = £1800
(b) Calculate Devon Ice Cream’s weekly profit in the summer. (3)
● Profit = TR – TC
Profit = (£1 x 4000) – £1800
Profit = £2,200
2a If a firm sells 200 widgets at £3.20 and 40 squidgets at £4, what is its total revenue? (3)
● 200 x £3.20 = £640
40 x £4 = £160
Total = £640 + £160 = £800
2b Each widget costs £1.20 to make, while each squidget costs £1.50. What are the total variable
costs? (3)
● 200 x £1.20 = £240
40 x £1.50 = £60
Total variable cost = £240 + £60 = £300

22
Unit
Costing
2c If fixed costs are £300, what profit is the business making? (3)
● Profit = Total revenue – total costs
Profit = £800 – £300 – £300 = £200
3 ‘Last week our sales revenue was £12,000, which was great. Our price is £2 a unit, which I think is
a bit too cheap.’
(a) How many unit sales were made last week? (2)
● £6,000
(b) If a price rise to £2.25 cuts sales to 5600 units, calculate the change in the firm’s revenue. (4)
● £2.25 x 5600 = £12,600
Revenue would increase by £600 if they increase the price to £2.25.
4 BYQ Co has sales of 4000 units a month, a price of £4, fixed costs of £9000 and variable costs of £1.
Calculate its profit. (4)
● Revenue = 4000 x £4 = £16,000
TC = £9000 + £4000 = £13,000
Profit = £16,000 – £13,000 = £3,000
5 At full-capacity output of 24,000 units, a firm’s costs are as follows:
managers’ salaries £48,000
materials £12,000
rent and rates £24,000
piece-rate labour £36,000
(a) What are the firm’s total costs at 20,000 units? (4)
● Fixed cost = £72,000
Variable cost = (£12,000 + £36,000) x 5/6 = £40,000
Total cost = £72,000 + £40,000 = £112,000

22
Unit
Costing
(b) What profit will be made at 20,000 units if the selling price is £6? (1)
● 20,000 x £6 = £120,000
£120,000 – £112,000 = £8,000
B2 Case study
(Refer to case study on page 164 of the textbook.)
1 Which of Mary’s two prices would provide her with the higher monthly revenue? (3)
● Revenue at £4 = £4 x 125 = £500 per month
Revenue at £5 = £5 x 100 = £500 per month
The revenues would be equal.
2 Calculate Mary’s monthly profits (or losses) in each case. (6)
● Profit at £4 = £500 – (£350 + (50p x 125) )
£500 – £412.5
Profit = £87.50
Profit at £5 = £500 – (£350 + (50px 100)
Profit at £5 = £500 – £400
Profit at £5 = £100
3 Analyse two possible reasons why Mary’s financial forecasts might not prove to be accurate. (7)
● limited research
● respondents may say they will use her product but in reality they may not
● the costs are only estimations and may be higher than forecast.

22
Unit
Costing
4 Analyse the case for and against Mary charging £5 per household for her window-cleaning service.
(9)
Case for:
● higher profit
● less work and therefore less time pressure
● each unit sold will contribute more to fixed costs and eventually profit.
Case against:
● lower demand
● might be undercut by competitors
● will be less competitive.
B3 Case study
(Refer to case study on page 164 of the textbook.)
1 What is meant by the term ‘variable costs’? (2)
● A cost which changes in relation with output.
2 Calculate Robert’s forecast profits for his first three months’ trading. (5)
● January: Total revenue = 40 x £40 = £1600
Total cost = (40 x £15) + £1000 = £1600
Total profit = £1600 – £1600 = £0
● February: Total revenue = 50 x £40 = £2000
Total costs = (50 x £15) + £1000 = £1750
Total profit = £2000 – £1750

22
Unit
Costing
● March: Total revenue = 60 x £40 = £2400
Total costs = (60 x £15) + £1000 = £1900
Total profit = £2400 – £1900
3 Robert estimates that if he cut his prices by 10% he would have 20% more customers each month.
Calculate the outcome of these changes and whether this would benefit Robert. (8)
● Revenue would increase fairly significantly which would, in turn, increase market share.
● This increased market share will make the firm a bigger player in the market.
● Profit also increases but only slightly (£8) – is it worth the hassle?
8 marks

4 Examine the case for and against a bank lending Robert £10,000 on the basis of his forecast profits.
(10)
The case for may include:
● It seems to be a potentially profitable business and therefore he should be able to pay back the
money.
● It is a growing market and therefore sales should increase over time.
The case against may include:
● Poor research suggests he may not have very good attention to detail.
● Profit is not very high.
● Risky.
10 marks

22
Unit
Costing
Essay questions
1 Discuss whether a new ethnic restaurant, trading in a very competitive market, should aim to
maximise its revenue, rather than its profits, during its first year of trading.
● Depends on the financial situation – if risky then it needs to focus on profit.
● It should aim to maximise revenue as this will help to increase brand awareness.
● Not if prices are so low that profit can’t be made.
● No, because costs will vary significantly with output (as restaurants have high variable costs) so
profit is the key.
2 For all new enterprises it is vital to sell at the right price – this is the most important determinant
of profits. Discuss whether this view is always correct.
● Yes, because if you sell at a price which is too low, profit will be low and if the price is too high,
customers will not buy. Therefore demand will fall, revenue will fall and profit will be lower.
● Yes, price is important but the key to success is differentiation which allows a firm to increase
price without demand falling significantly.
● Price is just one of a number of vital factors that determine the level of profit, but it is certainly
one of the most significant.
3 The newly opened Bolton bakery is the first upmarket baker in the town. The owners expect to
make a £50,000 profit in their first year. Evaluate the factors that might stop them from achieving
this.
Possible factors include:
● Underestimation of costs. This would lead to costs being higher than anticipated, thus profit
would be lower than anticipated.
● Overestimation of revenues. This would lead to revenue being lower than anticipated, thus profit
would be lower than anticipated.
● Inability to meet demand. If the bakers are unable to produce efficiently enough to meet the sales
level required to make £50,000 profit they will not achieve this target.

22
Unit
Costing
● Poor financial management. If cash flow is not managed effectively and expensive overdrafts are
needed in times of negative cash flow, the bank charges will affect the level of profit.
● Poor marketing. Marketing can increase a firm’s ability to make a profit if it is good, but if their
marketing is poor it may just serve to increase costs rather than bring in extra revenue as
intended.
● Lack of demand.

23
Unit
Break-even analysis
Revision questions
1 What is meant by the term ‘break-even point’? (2)
● The level of output at which total revenue equals total costs. Hence the business makes neither
a profit nor a loss.
2 State three reasons why a business might conduct a break-even analysis. (3)
● To estimate the future level of output it will be required to produce.
● To assess the impact of changes in costs on profits and/or the volume required to break even.
● To support an application for finance from a bank or other financial institution.
3 List the information necessary to construct a break-even chart. (4)
● Selling price.
● Fixed costs.
● Variable costs.
● Maximum capacity of the business.
4 How would you calculate the contribution made by each unit of production that is sold? (2)
● Contribution can be calculated for each unit of production by subtracting the variable cost of
producing a single unit from its selling price.
5 A business sells its products for £10 each and the variable cost of producing a single unit is £6. If
its monthly fixed costs are £18,000, how many units must it sell to break even each month? (3)
Break-even point will be as follows:
● £18,000 (fixed costs) / £4 (contribution per unit)* = 4500 customers per month
*Contribution per unit = £10 (sales price) – £6 (variable costs per unit)
6 Explain why the variable cost and total revenue lines start at the origin of a break-even
chart. (3)
● If a firm does not produce any output it will not incur any variable costs (fuel, materials, etc.),
nor will it earn any revenue since it does not have any products to sell. For these reasons variable
costs and total revenue lines on a break-even chart commence at the origin.
23
Unit
Break-even analysis
7 What point on a break-even chart actually illustrates break-even output? (2)
● Break-even point on the chart occurs at that level of output where the total revenue line crosses
(and equals) the total costs line.
8 Explain how, using a break-even chart, you would illustrate the amount of profit or loss made at
any given level of output. (2)
● Profits are shown on the break-even graph at outputs in excess of break-even output. They are
shown by the vertical distance between the total revenue line and the total cost line. Losses occur
below break-even output and are shown by the vertical distance between the total cost line and
the total revenue line.
9 Why might a business wish to calculate its margin of safety? (2)
● The margin of safety is a useful guide to a business because it illustrates the amount by which
output and sales can fall from their current level before the business reaches break-even output.
A firm with a low safety margin should consider strategies for enabling prices to be increased or
costs to be cut.
10 A business is currently producing 200,000 units of output annually, and its break-even output is
120,000 units. What is its margin of safety? (2)
● The margin of safety equals current output less break-even output. Thus in this case it is 80,000
units.
Revision exercises
B1 Data response
(Refer to questions on page 173 of textbook.)
1a Construct the break-even chart for Paul’s planned business. (9)
● Break-even point = 500 customers per month (refer to graph).
1b State, and show on the graph, the profit or loss made at a monthly sales level of 600 customers. (4)
● At 600 customers per month, the profit/loss made by the business is as follows:

23
Unit
Break-even analysis
£
Total revenue
(£110 ⫻ 600) 66,000
Total costs:
Fixed costs (£10,000)
Variable costs:
(£90 ⫻ 600) (£54,000)
64,000
Profit/loss 2,000
The hotel will make a profit of £2,000 per month (refer to graph).
1c State, and show on the graph, the margin of safety at that level of output. (4)
100 (3a)
New Total
Revenue
90 Total
Revenue
Total Costs
80
70
(1a) (3a)
60
Cost/revenues (£000s)
(2b)
50
3b
40
30
(1c)
20
Fixed Costs
10
0
0 100 200 300 400 500 600 700 800
Output (Number of customers)

23
Unit
Break-even analysis
● The margin of safety at 600 customers

= sales volume – break-even output*
= 6000 customers – 5000 customers
= 1000 customers per month
*Break-even point = £10,000 / (£110 – £90) (refer to graph)
2 Paul’s market research shows that, in his first month of trading, he can expect 450 customers at his
hotel.
(a) If Paul’s research is correct, calculate the level of profit or loss he will make. (5)
● At 450 customers per month, the profit/loss made by the business is as follows:
£
Total revenue
(£110 ⫻ 450) 49,500
Total costs:
Fixed costs (£10,000)
Variable costs:
(£90 ⫻ 450) (£40,500)
50,500
Profit/loss (1,000)
The hotel will make a loss of £1,000 per month.
(b) Illustrate this level of output on your graph and show the profit or loss. (3)
Refer to graph.
3 Paul has decided to increase his prices to give an average revenue per customer of £120.
(a) Draw the new total revenue line on your break-even chart to show the effect of this change. (3)
Refer to graph.
(b) Mark on your diagram the new break-even point. (1)
Refer to graph.
(c) Calculate Paul’s new break-even number of customers to confirm the result shown on your
chart. (6)
● If the average revenue per customer increases to £120, the new break-even number of customers
will be as follows:
= £10,000 / (£120 – £90)
= £10,000 / £30
= 334 customers per month (rounded up to the nearest customer).
23
Unit
Break-even analysis
4 Paul is worried that his break-even chart may be ‘misleading’. Do you agree with him? Justify your
view. (10)
Possible points include:
● Using a figure for ‘average revenue per customer’ over-simplifies the analysis – in reality, revenue
per customer will depend on the number of nights stayed in the hotel, the amount spent on
meals, drinks, etc. In addition, the hotel may offer discounts for customers staying for more than
one night, or at different times of the week or year.
● The analysis also assumes that variable costs will rise constantly – in reality, the hotel may be able
to negotiate discounts for buying supplies such as food and drink in bulk.
● The results of the analysis depend on Paul’s ability to forecast future costs and room prices accu-
rately.
● However, although break-even analysis may not give Paul precise figures as to the number of
guests needed to break even, it should give him some idea, which has to be better than having
no information at all.
10 marks

B2 Data response
1 What is a break-even chart? (4)
Possible answers:
● A graph setting out the forecast costs and revenues associated with a given product.
● It allows profits or losses to be read off at each level of output.
● It illustrates the level of output necessary to cover costs (i.e. to break even).
2 Calculate the following:
(a) the variable cost of producing 1000 T-shirts

23
Unit
Break-even analysis
● The variable cost of producing 1000 T-shirts is £6,000.
(b) the contribution earned through the sale of one T-shirt. (6)
● The contribution from the sale of a single T-shirt is £9 (£15 ⫺ £6).
3 Shelley has decided to manufacture the shirts in Poland. As a result, the variable cost per T-shirt
(including commission and distribution costs) will fall to £15. However, fixed costs will rise to
£12,000.
(a) Calculate the new level of break-even for Shelley’s T-shirts.
● £12,000/£35 ⫺ £15 ⫽ 600
(b) Calculate the margin of safety if sales are 1000 T-shirts per month. (10)
● Margin of safety ⫽ 1000 ⫺ 600 ⫽ 400
4 Should Shelley rely on break-even analysis when taking business decisions? Justify your view. (10)
● It is a useful technique for assessing the impact of changes in costs and revenue.
● However, it assumes that all output is sold.
● The model ignores factors such as economies and diseconomies of scale.
10 marks

Essay questions
1 ‘Break-even is the most vital part of a business plan for a new enterprise.’ Do you agree with this
statement? Justify your view.
Support for the statement:
● Break-even analysis provides a very clear, understandable projection of the output and sales that
will be necessary for the business to be profitable. This is vital when making decisions about
whether to start, or how to structure a new enterprise.

23
Unit
Break-even analysis
● Break-even analysis is simple to understand which may make it especially useful for small or new
enterprises which are not yet able to employ more sophisticated techniques.
● Banks and other financial institutions will consider this information a vital part of a new busi-
ness plan and its inclusion will indicate good business sense.
● It may help a business to make important decisions about how to structure production, such as
whether to produce its own components or whether to purchase them from external sources.
However:
● Break-even analysis is only as good as the data upon which it is based, and poor quality data may
result in inaccurate conclusions. New businesses (particularly those which are quite different
from their closest competitors) may have trouble finding suitable data upon which to base their
calculations, greatly reducing the value of the break-even analysis.
● The model simplifies the realities of the market, failing to take into account the fact that firms
may benefit from bulk buying inputs; that the firm may not sell all its output; or that it may not
sell all its output at a single price.
2 ‘Break-even analysis is of limited value to a start-up business because it ignores the market.’ To
what extent do you agree with this statement?
● Break-even analysis does clearly illustrate the relationship between possible costs of production
and the possible price of the product at various levels of output. This is a necessary starting point
for many production decisions.
However:
● Because break-even analysis is based on a simplified version of the market it does ignore many
of its complexities, greatly reducing the value of the analysis for a start-up business. For example:
– It cannot determine the actual sales of a product. Sales data is speculative. The analysis also
works on the assumption that all output is sold, and that there will be no fluctuations in
demand.
– It does not take into account variations in the price of inputs, such as discounts through bulk
buying.
– It does not take into account variations in the price of the product, such as through dis-
counting.
● The value of break-even analysis may be limited when used in isolation, however, as one of a
number of factors – including market research to indicate possible demand – it can help to
create an overall picture of the market which can be of enormous value.

24
Unit
Revision questions
1 Identify one risk from each of the following business decisions. Briefly explain what you think the
risk is:
(a) Doubling the advertising budget when a firm’s sales haven’t increased compared to last year.
(2)
● This spending may not lead to a sufficient increase in sales to cover the cost of the adver-
tising and therefore there is a risk attached to this act.
(b) A bakery switching to a new supplier of flour. (2)
● The new supplier may not be as reliable or as good as the previous supplier. Also bread is
made from very few ingredients, the main one being flour, so poor-quality flour could have
a serious effect on the end product.
(c) An entrepreneur borrowing £80,000 secured against his house, when interest rates are nice and
low at 3.25%. (3)
● With interest rates low at 3.25% the interest payments may seem affordable, but there is a
risk that they will increase, which may put the entrepreneur in financial difficulty.
2 Why may a successful entrepreneur be good at ‘moderate risk-taking’ rather than ‘high risk-
taking’? (3)
● High-risk-taking activities may fail more often than they succeed, and therefore not lead to
success. Entrepreneurs who are successful are more likely to be good at ‘moderate risk-taking’,
which is more likely to prove a success.
Revision exercises
B1 Data Response
1 Using the payback and ARR, and any other relevant information you think would be necessary
to make the decision, assess which option the bakery should choose. (20)

24
Unit
● This is not just a numerical question, the answers must be analysed in context and used along-
side other information to come to a decision.
Payback: New oven Oven upgrade

Cost: £150,000 Cost: £30,000
6 years, 9 months 3 years

total cash flow- initial cost
ARR i. expected life
156,000 – 150,000 46,000 – 30,000
ii. 10 = 600 ii. 5 = 3200
600 3,200
iii. 150,000 × 100 = 0.4% iii. 30,000 × 100 = 10.7%
At first glance the indication is that the oven upgrade is the best option. It will pay back the initial
investment quicker and its return in terms of profitability is much higher.
Other criteria on which the decision needs to be made:
● Economic life of upgrade plus additional maintenance costs.
● Cash flow after years of life.
● The figures are estimates which may differ significantly.
● Economic condition may change affecting ability to raise finance.
● The long-term objectives of the business.
● Competition.
● Type of product.
B2 Data response
(Refer to questions on pages 178–9 of the textbook)
1 Calculate the investment appraisal for the Leeds store, using both payback and ARR.
Recommend whether or not the business should open this second outlet on purely numerical
grounds. (8)

24
Unit
● This question requires a simple analysis and recommendation based on an analysis of the
payback and ARR of this new outlet.
Payback:
Initial cost £400,000
Net cashflow:
(000)
Year 0 (400)
Year 1 (100)
Year 2 100
Year 3 200 Payback: 3 years, 8 months
Year 4 300
Year 5 300
ARR:
800,000 – 400,000
5 = 80,000
80,000
400,000 × 100 = 20%
Reasons for:
● Payback is well before the end of economic life, therefore any cash flows would be positive.
● Trend is net cash flow rising.
● ARR is healthy at 20% in comparison to rate of interest on borrowing of 5%. Even with a rise in
interest rates this is still healthy.
● Might be able to raise finance internally from retained profit.
Against:
● Cash flow forecasts are estimates.
● Money for investment has to be raised.
● No account of the time value of money.
● Business already has substantial debt in loans and overdraft.
2 Discuss the other issues raised in the case material, then make a justified recommendation about
whether or not the firm should proceed. (12)
Other information that must be considered:
● Falling demand for organic food.

24
Unit
● Assumption that 5 times the population will lead to 5 times the sales.
● Size of investment versus the risk.
● Doing well in Harrowgate in spite of competition.
● Less competition in Leeds.
● Demographic/market segment considerations.
● Growth in competition from large supermarkets.
Level 3 Candidate evaluates the decision in financial and non-financial (12-9)

terms and makes a judgment.
Level 2 Candidate analyses the decision in financial and non-financial (8-5)
terms with no judgment.
Level 1 Candidate explains either financial or non-financial reasons for (4-1)
the decision.

Decision-making and final
25
Unit
accounts
Revision questions
1 What is meant by ‘net profit’? (2)
● Net profit measures the profit left after all the operating costs of the business have been
deducted.
2 What is meant by ‘revenue’? (2)
● The value of a firm’s sales over a given period of time.
3 Does an increase in price necessarily increase revenue? (3)
● No. An increase in price results in an increase in revenue only if the product is price inelastic (has
a PED of less than 1).
4 How can revenue increase without an increase in cash inflows? (3)
● Revenue is not necessarily actual money but rather just a sales transaction. So if goods were
ordered on credit, the revenue would increase but the cash inflow would not.
5 Explain two ways of increasing profits. (6)
● Increase the level of sales revenue.
● Reduce costs.
6 Why might cutting costs end up reducing profits? (3)
● It could result in a reduction in quality, which may lead to a decline in repeat purchasing and
thus result in a decline in revenue and, in turn, a fall in profits. Additionally, if the cut in costs
leads to a decline in quality, the firm may be forced to reduce the price and therefore reduce the
profit per unit.
7 In what ways do the different functions of a business affect its profits? (4)
● Marketing activities tend to be expensive and are a large fixed cost to the firm and thus could
reduce profit. However, if the marketing is successful it could increase revenue, which would, in
turn, help to increase profit.

25
Unit
accounts
● Operations – if production could reduce the cost per unit by reducing wastage, this would
increase profit (provided it did not result in a fall in quality and hence revenue).
● The revenue brought in by the sales department could also be mentioned.
● The finance department also has the ability to reduce costs and thus increase profit.
8 A business has an opening stock of £30,000, closing stock of £10,000 and cost of sales of £60,000.
Calculate the value of purchases. (3)
Opening stock £30,000

+ Purchases £40,000
Less closing stock £10,000
Cost of sales £60,000
Answer £40,000
Revision exercises
B1 Data response
1 Distinguish between revenue, costs and net profit. (3)
● Revenue is the value of sales; costs are how much it costs a firm to produce the product and
maintain the business; net profit is revenue ⫺ total costs or net profit ⫽ gross profit ⫺ expenses.
2 Explain why a fall in price might not have led to an increase in revenue. (5)
Candidates should show understanding of price elasticity of demand, although they don’t need to
use the term.
● When prices fall, revenue will increase only if demand increases at a faster rate than the price has
fallen (i.e. the product is price elastic). However, if, for example, a 10% fall in price results in only
a 5% increase in demand, the fall in price will lead to a fall in revenue.
3 Apart from the methods mentioned in the text, analyse two other actions SOFA-SOGOOD might
take to improve its profitability. (8)
Any sensible answer should be credited.

25
Unit
accounts
● Reduce cost per unit by minimising wastage.
● If the product is price inelastic, an increase in price would lead to an increase in demand and an
increase in profitability.
● Reduce fixed costs per unit by achieving economies of scale.
● Reduce fixed costs per unit by minimising administrational costs.
8 marks

4 Discuss the advantages and disadvantages to the business of the staffing cost-saving actions taken
by Renis. (14)
Advantages include:
● Reducing costs may enable SOFA-SOGOOD to reduce prices, making it more competitive.
● Reducing costs will increase the contribution per unit, enabling it to break even at lower output.
Disadvantages include:
● Staff may become demotivated because of the pay freezes.
● The demotivation could lead to a reduction in productivity, which would drive up the labour
cost per unit and thus actually increase costs.
● Furthermore, the non-recruitment policy would prevent Renis from being open to recruiting
new staff who may bring new skills and ideas into the company.
● Also, the policy of not replacing staff who leave could cause problems as existing staff may have
to take on more work; this could lead to increased stress levels, which, in turn, may well lead to
increased levels of absenteeism and staff turnover, both of which will increase labour costs.

25
Unit
accounts
B2 Data response
1 Calculate the likely net profits for the college this year. (3)
● £15,000 ⫻ 200 ⫽ £3,000,000 revenue
● Net profit ⫽ £3,000,000 ⫻ 12% ⫽ £360,000
2 Outline two costs the college is likely to have. (4)
Possible costs include:
● salaries
● mortgage/rent costs
● stationery
● phone
● maintenance
● administration.
3 Explain one factor that might cause a change in demand for the college. (4)
Possible factors include:
● An increase in average income would result in an increase in demand as private schools are an
income-elastic product.
● Good A-level results may increase local awareness of the school, which may, in turn, increase
demand.
● If other schools in competition with the college get bad results this could also increase demand
for places at Farmoor.
4 Explain how the net profit of the college might be used. (5)
● The net profit could be used in marketing, in an attempt to increase demand.

25
Unit
accounts
● Net profit could be kept to ensure the college is financially sound in case there is a dip in the
economy, and thus in profits, in the future.
● Net profit could also be used for increasing the capacity of the college as it is currently operating
at near full capacity.
5 Analyse how you might measure the performance of the college apart from looking at its financial
results. (8)
● you could look at the league tables to see how good results are; however, the results of the college
may better reflect the quality of the students than the quality of the college/teaching
● it may be better to analyse added value rather than just results (i.e. the average increase/decrease
from predicted to actual results)
● you could also consider the views of the students/parents and how satisfied they are with the
education they/their children receive.
8 marks

6 Discuss the ways in which the college might increase its profits. (12)
● It could increase the price of fees, but the effectiveness of this strategy would depend on whether
the demand for private colleges in the area is price elastic or price inelastic.
● If it improves the quality of the education, this would lead to better results and potentially make
the college more price inelastic and enable it to increase price.
● It could also try to reduce costs – for example, try to reduce photocopying costs or administra-
tion costs.
● It could start charging parents for additional things like books, exam entrance and so on (if it
doesn’t already), to bring in some extra revenue.
12 marks

25
Unit
accounts
B3 Data response
1 Discuss the usefulness of a company’s final accounts to those who have a stake in the business. (12)
This question looks at the relative usefulness of accounts to different stakeholder groups.
Therefore, it requires a judgment to achieve evaluation marks.
● Shareholders/owners: high priority – profit, dividends, future share growth, future objectives
● Employees: limited use – security, wages and salaries
● Customers: limited – competitive prices
● Lenders: high priority – ability to repay debt, helps to make lending decisions
● Government: medium priority – depends on size of business – employment, effect on economy,

corporation tax, VAT, income tax
● Suppliers: ability to pay, regular orders
● Community: little importance
Level 3 Candidate compares the usefulness of accounts to at least two (12-9)

stakeholders and comes to a judgment about their relative
importance to these groups.
Level 2 Candidate analyses the usefulness of accounts to at least two (8-5)

stakeholder groups with no judgment.
Level 1 Candidate explains how one or more stakeholders might use (4-1)
accounts with no comparison or judgment.
2 Lugitall Ltd makes and sells rucksacks to professional climbers. It markets and sells its products
over the internet. Using the information presented in Table 25.2 explain why the value of working
capital is £76,000 and assess whether this is a good position for this company. (10)
Please note that in a limited number of copies of the student book this question incorrectly
referred to Table 17.2. The correct table is Table 25.2.
● Working capital constitutes current assets minus current liabilities. It indicates the ability of the
business to cover its short-term liabilities or debts. It is used for the day-to-day running of the

25
Unit
accounts
business. In this case the working capital is £76,000. The current assets are £86,000 and the
current liabilities are £10,000, therefore working capital is £76,000.
● In an ideal situation current assets should be about twice as much as the current liabilities. If the
assets are less than this the business may not be able to pay its suppliers and other short-term
creditors. However, it is also a problem if too much of the working capital is tied up in current
assets, in particular stock and debtors. In this case the working capital ratio is over 4:1. The busi-
ness has a lot of money tied up in stock which is not moving and debtors who have failed to pay.
These two issues may result in the business running out of cash in the short term. Therefore,
although the working capital situation is good, i.e. they have plenty, it may present a problem if
the business needs cash in the short term.
Level 3 Candidate analyses the importance of working capital in the (10-8)

context of this business and makes a judgment.
Level 2 Candidate analyses the working capital situation in context with (7-4)
no judgment.
Level 1 Candidate shows and applies knowledge of working capital with (3-1)
little or no analysis in context.
B4 Data response
1 Calculate Animo Ltd’s working capital for 2007 and 2008. (3)
Please note that in a limited number of copies of the student book, Fixed Assets for 2008 are incor-
rectly listed as 1200. Fixed Assets for 2008 should be 1500.
● Working capital: 2007 current assets – current liabilities
1100 – 950 = 150

current assets – current liabilities
800 – 825 = (25)
2 Analyse the reasons why working capital is important to a business such as Animo Ltd. (8)
This is an analysis question so it is important to use the context to assess the implications to the
business.
Importance:
● To pay for short-term debts such as farmers in UK and Europe.
● To pay for annual tax bill.

25
Unit
accounts
● To pay for day-to-day running of the business.
● To be able to set objectives in the long term.
● To ensure that an optimum ratio of 2:1 is maintained.
3 Analyse the ways in which Animo Ltd might improve its working capital. (8)
Methods of improving working capital:
● credit control/debtor management
● stock control policy
● creditor management
● changing storage and distribution methods
● foreseeing changes in demand.
Any of these options can be used in combination with the answers to 1 and 2 to show how the situ-
ation might be improved.

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OCR Business Studies for AS

1 Explain the meaning of the term budgeting. (2)

2 List three advantages that a budgeting system brings to a company. (3)

● Helps prevent over-spending

● Provides a yardstick against which performance can be measured

● Allows spending power to be delegated.

4 What are the advantages of a zero-based budgeting system? (3)

© Hodder Education 2008

7 Complete the budget statement by filling in the gaps. (8)

January February March April

January February March April

● Allows the delegation of spending power.

● Can be used to monitor performance.

12 Explain what is meant by a ‘favourable cost variance’. (2)

© Hodder Education 2008

13 Why is management by exception a useful time-saving measure for management? (4)

14 Explain two drawbacks of budgeting. (4)

● Targets can be unrealistic, and therefore demotivate budget holders.

16 Look at the table, then answer the questions that follow:

● May – budgeted profit ⫽ £1300

● May – actual profit ⫽ £1100

● June – budgeted profit ⫽ £1500

● June – actual profit ⫽ £1600 (4)

© Hodder Education 2008

(x) June (10)

(Refer to questions on page 139 of the textbook.)

1 Complete the budget statement by filling in the gaps. (4)

Jan–Mar Apr–Jun Jul–Sep Oct–Dec

© Hodder Education 2008

3 Explain why a budgeting system might help KB Watersports to:

(a) control expenses (6)

(b) motivate staff. (6)

● Shop staff may be motivated to try to hit their sales targets.

It is a crucial element, because:

Level 4 Evaluation and judgement of information in context (10-9)

Up to 3 marks per point.

● Money tends to be tighter in smaller firms.

Level 2 Application of knowledge in context (6-4)

© Hodder Education 2008

(Refer to questions on page 140 of the textbook.)

● More or better market research.

● Look more closely at past trends and patterns.

● Consult more fully with local manager.

© Hodder Education 2008

Level 2 Application of knowledge in context (6-4)

(Refer to questions on page 141 of the textbook.)

● Sales revenue was worse than expected, by 13%.

● Overheads were higher than budgeted.

● Therefore profit was reduced.

1 mark per point identified up to a maximum of 3, plus up to 2 marks for explanation.

● Prevents over-spending by giving managers targets within which to stick.

1 mark per point identified, second mark for brief explanation.

● Zero-based budgeting, expecting budget holders to justify every pound allocated.

© Hodder Education 2008

Month Sales variance Profit variance

● The rate of worsening seems to be slowing.

© Hodder Education 2008

1 What is meant by ‘cash flow’? (2)

2 What is a cash flow forecast? (3)