Analyse why accurate cost data is important for all businesses.

Mark scheme

Marking points from the official mark scheme (May/June 2018). The mark or mark type is shown in brackets.

1. [Reason] Accurate cost data is at the heart of current and future operations and decisions of business organisations.
2. [Reason] If costs are not recorded accurately, then managers have incomplete /misleading information on which to make decisions.
3. [Reason] Setting prices (e.g. cost-plus) requires accurate cost data.
4. [Reason] Calculations of gross margin/gross profit will lead to misleading information in the Income Statement if cost data is not accurate.
5. [Reason] The Balance Sheet will not be accurate unless inventory costs are correct.
6. [Reason] The valuation of assets on the Balance Sheet will be inaccurate if inventory costs are incorrect.
7. [Reason] Cost analysis is vital if costs are to be controlled and resources used efficiently.
8. [Reason] Cash flow forecasts need to be accurate if they are to be useful.
9. [Reason] Break-even estimates rely on accurate costing.
10. [Reason] With accurate cost data a business can run more effectively – e.g. sales prices can be set at a more competitive margin.
11. [Reason] Helps with good decision-making – e.g. investment of funds in new directions/cost cutting for savings both depend heavily on correct cost estimates.
12. [Point] Cash flow is critical for new businesses.
13. [Point] It is common for profitable businesses to run out of cash.
14. [Point] It is vital to have sufficient cash in the short term – profit may have to wait for the long term.
15. [Point] It is important that the distinction between cash and profit is recognised by the business.
16. [Point] New businesses are often given much less time to pay suppliers, given shorter credit periods.
17. [Point] Banks and lenders will require quick and agreed time repayment.
18. [Point] Finance may be difficult for new businesses to obtain, so they need to build up their own cash reserves.
19. [Point] So, cash flow management is critical for new business survival.
20. [Point] The process of generating revenue requires cash, so especially for a new business, cash is more important than profit.
21. [Point] A focus on cash in the early days of a new business may well lead to profit in the long run.
22. [Evaluation] Evaluation might well recognise that in the long run, both cash and profit are important. Profit is a long term key objective and sufficient cash is needed in the short term to support any profit made.