Revision Notes

A Level Accounting: Costs, cost behaviour and traditional costing methods (Cambridge 9706) – Revision Notes

Condensed revision notes on cost behaviour, FIFO and AVCO, absorption and marginal costing, break-even and decisions for Cambridge 9706 AS Accounting.

Subject: Accounting
Level: AS LEVEL
Topic: Cost and management accounting
Author: Marlbridge Academic Team
Updated: 25 October 2026
Reviewed by: Zain Ud Din Ahmed (what this means)

Aligned to Cambridge A Level Accounting (9706), 2026-2028. Official specification .

Syllabus page (what it covers and how it is assessed): Cambridge A Level Accounting.

Syllabus points this page covers

9706 (AS Level)

2.1 Costs and cost behaviour
2.2 Traditional costing methods

Found an error? Report a correction.

Need help with this topic? Request a free trial class for A Level Accounting (9706).

Full explanations and worked examples are in the study guide. These notes condense sections 2.1 Costs and cost behaviour and 2.2 Traditional costing methods of the Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028 (AS Level content). All businesses and figures are invented and all amounts are in dollars. Test yourself with the practice questions, tick off the checklist, find the course hub and try the free diagnostics.

Key terms

Term	Meaning
Direct cost	Traceable to a cost unit: direct materials, direct labour, direct expenses
Prime cost	Total of direct costs
Indirect cost (overhead)	Not traceable to one unit
Fixed / variable	Constant / changes in proportion to output
Semi-variable	Fixed part plus variable part
Stepped	Fixed within a range, jumps at a threshold
Cost centre	Department, process or location where costs are collected
Cost unit	Unit of product or service costs are charged to
Allocate / apportion	Charge a whole overhead to one centre / share it on a fair basis
Reapportion	Recharge service department costs to production departments
Contribution	Selling price minus variable cost
Margin of safety	Budgeted sales minus break-even sales
JIT	Materials arrive when needed, so little inventory is held

Four small graphs of cost against benches made. Rent is a flat 18,000 pounds, timber rises 38 pounds per bench from zero, electricity starts at a 2,400 pound standing charge and adds 1.50 per bench (5,400 at 2,000 benches), and a supervisor cost steps from 28,000 to 56,000 pounds after 2,500 benches. — Fixed, variable, semi-variable and stepped costs behave differently as output grows.

2.1.1 Materials, labour and cost behaviour

Split wages into direct labour and indirect labour. Overtime premium is usually an overhead unless one job caused it.
Issues of materials go to a unit or job (direct) or to overheads (indirect).
High-low method: variable cost per unit = change in cost / change in output; fixed part = cost minus variable part.
Stepped cost: round the number of steps up (65 workers at one supervisor per 20 needs 4).

Inventory valuation

	FIFO	AVCO
Issues priced at	Oldest cost first	Weighted average
Closing inventory	Latest purchases	Units × average
Periodic	Value once at period end	One average for all goods available
Perpetual	Update after each movement; gives the same closing value as periodic FIFO	New average after every receipt

Keldon Bags: opening 50 at 4.00, bought 50 at 5.00, then 60 issued, 40 left. FIFO closing 40 × 5.00 = 200, cost of issues 450 − 200 = 250. AVCO average 450 / 100 = 4.50, closing 180, cost of issues 270. Rising prices: FIFO gives higher closing inventory and higher profit.

Dunnock Pumps has 400 units costing 5,200 dollars: 100 at 12, 200 at 13 and 100 at 14. Under FIFO the oldest 300 units are issued for 3,800 and the closing 100 are the newest layer, 1,400. Under periodic AVCO every unit is valued at 13.00, so issues cost 3,900 and closing inventory is 1,300. — FIFO leaves the newest layer in closing inventory; periodic AVCO values every unit at one average.

Five columns track units and value in stock. After each purchase the average is recalculated: 12.67 after the 5 March receipt and 13.20 after the 18 March receipt. The issues cost 1,900 and 1,980, leaving 100 units worth 1,320. Closing inventory is 1,400 under FIFO, 1,300 under periodic AVCO and 1,320 under perpetual AVCO. — Perpetual AVCO recalculates the average after every receipt, so it differs from periodic AVCO.

JIT

Principles: small frequent deliveries, reliable suppliers, quality built in, planning matched to demand. For: lower storage cost, less cash tied up, less obsolescence. Against: stoppages from late delivery, lost bulk discounts, higher ordering costs. Best when suppliers are reliable and demand is steady.

Bars to scale show Whinfell Cycles costs for 400 bikes. Direct materials (34,000) and direct labour (16,800) are traced to each bike and make a prime cost of 50,800. Indirect materials, labour and expenses (1,200, 3,000 and 5,600) make overheads of 9,800. Production cost of 60,600 divided by 400 bikes is 151.50 a bike. — Prime cost plus production overheads gives the full production cost per bike.

Power cost is 4,150 dollars at 300 bikes and 4,950 at 500. The extra 800 for 200 more bikes gives 4.00 a bike, and 4,150 less 300 times 4.00 leaves a fixed part of 2,950. At 400 bikes the cost is 2,950 plus 1,600, which is 4,550. — Two known points give the variable cost per unit and the fixed part of a semi-variable cost.

Two sawtooth graphs with the same use of 100 units a day show bulk delivery (1,000 every 10 days, average stock 500) against just in time (200 every 2 days, average stock 100). The benefit is less stock and cash tied up; the risk is that a late delivery stops production. — Just in time holds far less stock but depends on reliable delivery (illustrative numbers).

A step graph of inspector cost: 2,100 dollars up to 250 bikes, 4,200 to 500 and 6,300 above. 400 bikes need two inspectors ($4,200) and 520 need three ($6,300). — A stepped cost jumps each time output passes another 250 bikes.

An assembler’s 40 hours at 14 dollars cost 560 and 5 overtime hours at time and a half (21 dollars) cost 105, a total of 665. Overtime caused by one customer’s rush job is usually charged to that job; general overtime is an overhead. — Overtime is paid at time and a half and charged to a job or to overheads depending on its cause.

2.2.1 Unit, job and batch costing

Method	Use	Cost per unit	Example
Unit	Identical output or a repeated service	Total cost / units	Cost per patient visit
Job	Work to customer order	Costs collected per job	Custom furniture; an audit assignment
Batch	Groups of identical items	Batch cost / items	Bakery batch; laundry load

Method in steps for a job or batch statement: direct materials, direct labour, direct expenses, absorbed overhead, total cost, then add mark-up (on cost) or margin (on selling price).

Unit costing divides a service total of 33,300 dollars by 740 sessions to give 45.00 a session. Job costing adds materials 1,860, labour 750 and overhead 560 to give a job cost of 3,170, then adds a 30 percent mark-up of 951 for a price of 4,121. Batch costing divides a 240 batch cost by 250 loaves to give 0.96 a loaf. — Unit and batch costing divide the total by the number of items; job costing builds a cost and adds a mark-up.

2.2.2 Absorption costing

Steps for overhead analysis:

Allocate overheads belonging wholly to one centre.
Apportion shared overheads (rent on area, insurance on asset value, power on kWh).
Reapportion service department totals to production departments.
OAR = budgeted overhead / budgeted activity (machine hours for machine-led work, labour hours for labour-led work).
Absorbed overhead = actual activity × OAR.

Quarnby Fabrics: budget overhead 90,000, budget labour hours 15,000, so OAR 6.00. Actual 14,200 hours and 88,000 overhead. Absorbed 85,200, so under-absorbed by 2,800, which reduces profit. Absorbed above actual means over-absorbed, which raises profit.

Causes: actual activity differs from budget, actual spending differs from budget, or both.

Uses: full cost for pricing, inventory valuation, product cost comparisons.
Limitations: subjective bases, fixed costs spread as if variable, profit depends on production level, arbitrary service department splits.
Decision support: useful for long-run pricing and cost recovery; not enough alone for short-run choices, because fixed costs may not change.

Stores holds 13,000 and Maintenance 12,000. Stores is shared 60:40 so Cutting gets 7,800 and Assembly 5,200. Maintenance is shared 75:25 so Cutting gets 9,000 and Assembly 3,000. Cutting totals 54,000 and Assembly 31,000, making 85,000 in all. — Service department costs are reapportioned one way, into the production departments.

Stores (13,000) is shared 60:40 and Maintenance (12,000) 75:25 between Cutting and Assembly, so Cutting rises from 37,200 to 54,000 and Assembly from 22,800 to 31,000; the total of 85,000 is unchanged. — Service department costs are reapportioned to the production departments, leaving the total unchanged.

Five bars show indirect labour allocated, and rent, depreciation, power and canteen apportioned between Machining and Assembly on stated bases. Totals are 128,000 and 114,000 pounds, summing to 242,000. — Overheads are allocated where one department caused them and apportioned on a fair basis where they are shared.

Rates of 3.20 pounds per machine hour and 3.80 per labour hour are budgeted overheads divided by budgeted hours. They build the full cost of one table to 175 pounds, which gives 245 pounds with a 40 percent mark-up or 250 with a 30 percent margin. — The OAR charges each product its share of overheads, giving a full cost to which a mark-up or margin is added.

Machining absorbed 132,800 pounds against 131,000 actual, over-absorbed by 1,800. Assembly absorbed 109,440 against 113,200, under-absorbed by 3,760. Net 1,960 pounds under-absorbed is deducted from profit. — Absorbed = OAR x actual hours; absorbing more than actual is over-absorption and adds to profit.

2.2.3 Marginal costing

Measure	Formula
Contribution per unit	Price − variable cost
Break-even point (units)	Fixed costs / contribution per unit
C/S ratio	Contribution / sales
Break-even revenue	Fixed costs / C/S ratio
Target profit units	(Fixed costs + target) / contribution per unit
Margin of safety	Budgeted − break-even sales, in units, revenue or % of budget

Brindley Tools: price 50, variable cost 30, fixed costs 80,000. Contribution 20; break-even 4,000 units (200,000 revenue); C/S ratio 40%; target profit 30,000 needs 110,000 / 20 = 5,500 units; with budget 6,000 units, margin of safety 2,000 units, 33.3% of budget (100,000 revenue).

Break-even chart (reading only, you will not be asked to prepare one). Revenue line from the origin; total cost line from fixed costs; crossing point is break-even; loss to the left, profit to the right; margin of safety is the gap between budget and break-even output.

Break-even limitations: constant price and variable cost, fixed costs fixed, one product or fixed mix, production equals sales, no step changes.

Marginal statement: sales − variable costs = contribution − fixed costs = profit. Inventory is valued at variable cost only.

Reconciliation: marginal profit + fixed overhead in closing inventory − fixed overhead in opening inventory = absorption profit. Inventory up: absorption profit higher. Inventory down: marginal profit higher. No change in inventory: equal.

Uses: contribution by product, short-run decisions, no inventory distortion of profit.
Limitations: needs a fixed and variable split, long-run prices must still cover fixed costs, not full cost.

A profit line for Wyncombe Toys (contribution 16 dollars, fixed costs 48,000) crosses zero at 3,000 units, gives 16,000 at the budgeted 4,000 (margin of safety 1,000 units, 25%) and reaches the 20,000 target at 4,250 units. The C/S ratio of 40% gives break-even revenue of 120,000. — Target units are fixed costs plus target profit divided by contribution per unit.

A 110 pound bench splits into 66 pounds marginal cost and 44 pounds contribution. On the chart, revenue crosses total costs at 1,400 benches and 154,000 pounds; left is loss, right is profit. At budgeted sales of 2,000 benches profit is 26,400 pounds and the margin of safety is 600 benches. — Break-even is where revenue meets total cost; the gap to budgeted sales is the margin of safety.

Ostrell Glassware in two years: inventory rises by 1,500 vases in Year 1, so absorption profit is 12,000 higher (76,400 v 64,400). Inventory falls by 1,200 in Year 2, so marginal profit is 9,600 higher (99,760 v 90,160). The difference is the change in inventory times 8 of fixed overhead. — Profit differs between the methods only when inventory changes, by fixed overhead per unit times the inventory change.

Contribution per unit is 24, 36 and 15 pounds for A, B and C, but per scarce hour it is 12, 9 and 15, so the ranking is C, A, B. Filling 4,000 hours in that order gives 1,000 C, 800 A and 350 B, contribution 46,800 and profit 16,800 after fixed costs of 30,000. — With a limiting factor, rank products by contribution per unit of the scarce resource, not per unit.

Making a bracket costs 8.20 pounds extra and buying 9.40, so buying costs 1.20 more, 14,400 pounds a year; the 2.50 fixed share is paid either way. The Gifts line shows a 1,500 pound loss, but closing it loses 18,000 contribution and saves 6,000 fixed costs, so profit falls by 12,000. — Only costs and revenues that change with the decision are relevant; apportioned fixed costs often are not.

Decision rules

Decision	Method	Small reminder
Make or buy	Make cost = variable cost + avoidable fixed cost, compared with purchase price	8,000 units: variable 9.00 + avoidable fixed 10,000 / 8,000 = 1.25 gives 10.25, against a quote of 10.50, so make (saves 2,000)
Special order	Accept if price > variable cost and spare capacity	2,000 units at 16.50, variable cost 14.00: extra contribution 5,000
Closure	Compare contribution with avoidable fixed costs; ignore unavoidable shared costs	Contribution 40,000 − avoidable fixed 28,000 = 12,000 benefit, so keep even though allocated head office costs of 20,000 give a reported loss of 8,000
Limiting factor	Rank by contribution per unit of scarce resource	Fill demand in order of ranking until the resource runs out
Target profit	Units needed from the formula above	See table

If a make-or-buy decision frees capacity, include the contribution the capacity could earn.

Non-financial factors (2.2.2, 2.2.3 and 2.2.4): quality, supplier reliability, customer relationships and reputation, employee morale and job security, environmental impact, available capacity, legal and ethical issues. Give one in context and say how it could change the decision.

CVP analysis. Advantages: quick, shows effects of price, cost and volume changes, supports target profit planning and margin of safety. Limitations: linear assumptions, ignores non-financial factors, short-run in nature, relies on accurate splits of fixed and variable costs.

Must-know distinctions

Allocate (whole overhead to one centre) versus apportion (share) versus reapportion (service to production).
Cost centre (where costs collect) versus cost unit (what costs are charged to).
Direct/indirect (traceability) versus fixed/variable (behaviour): a cost can be both indirect and fixed or both direct and variable.
Periodic (value once) versus perpetual (continuous record).
Under-absorbed (absorbed < actual, profit lower) versus over-absorbed (absorbed > actual, profit higher).
Mark-up (on cost) versus margin (on selling price).

Quick self-test

Classify a factory supervisor’s salary by traceability and behaviour.
A cost has a fixed part of 2,000 and variable 3.00 per unit. Find the cost at 1,500 units.
One supervisor costing 2,500 is needed per 20 workers or part. Find the cost for 65 workers.
In rising prices, which of FIFO and AVCO gives the higher profit?
Overhead 72,000 and 9,000 machine hours. Find the OAR.
Overhead absorbed is 61,000 and actual overhead is 64,500. State the result and its effect on profit.
Price 18, variable cost 11, fixed costs 21,000. Find the break-even point in units.
Find the C/S ratio for question 7.
Budgeted sales 3,600 units and break-even 3,000 units. Find the margin of safety in units and as a percentage.
Inventory rises by 400 units and fixed overhead is absorbed at 5 per unit. Which profit is higher and by how much?
State one risk of JIT.
State two non-financial factors in a make-or-buy decision.

Answers

Indirect labour; fixed.
2,000 + 1,500 × 3 = 6,500.
65 / 20 = 3.25, so 4 supervisors = 10,000.
FIFO.
72,000 / 9,000 = 8.00 per machine hour.
Under-absorbed by 3,500; profit is reduced.
Contribution 7; 21,000 / 7 = 3,000 units.
7 / 18 = 38.9%.
600 units; 600 / 3,600 = 16.7%.
Absorption profit, by 400 × 5 = 2,000.
A late delivery halts production (or lost bulk discounts).
Any two from supplier reliability, quality, employee morale, reputation, environmental impact.

Where marks are usually lost

Calling a cost direct or indirect without a reason tied to traceability.
Using the wrong activity: absorbing overhead on budgeted rather than actual hours.
Under or over absorption stated without saying which, or without the effect on profit.
Dividing fixed costs by price rather than contribution per unit.
Including unavoidable allocated costs in a closure decision.
Ranking limiting-factor products by contribution per unit.
Reconciling the profits with the adjustment in the wrong direction.
Recommending without a balanced reason or a non-financial factor.

Frequently asked questions

Which sections of Cambridge 9706 cover costs and traditional costing? Sections 2.1 Costs and cost behaviour and 2.2 Traditional costing methods are AS Level content in Cambridge 9706. They cover cost classification, inventory valuation, unit, job and batch costing, absorption costing, marginal costing and break-even analysis.

What is the difference between job and batch costing? Job costing collects costs for work done to a customer’s specification. Batch costing collects costs for a group of identical items made together, and cost per item = batch cost ÷ items in the batch.

Which costs are relevant in a closure decision? Only future costs that change with the decision are relevant. Unavoidable allocated fixed costs continue whether or not the product or department closes, so they should be left out.

How should under or over absorption be reported? State whether overhead is under- or over-absorbed and its effect on profit, as well as the figure. Under-absorption reduces profit and over-absorption increases it.

Official syllabus

Cambridge International, AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028, sections 2.1 and 2.2.

Get free revision emails (optional)

Occasional emails with practice questions, worked explanations and links to free resources for the qualification and subjects you choose. No spam, and you can unsubscribe from any email. The free tools on this site never need an email.

Related resources

Studying this with a teacher

Working through Accounting AS LEVEL?

This page is free and stays free. If you would rather be taught it, Marlbridge runs Accounting classes one-to-one and in small groups of up to 15, online in your own time zone. The first trial class is free. WhatsApp replies within an hour (8am–11pm Pakistan time, every day); email the same day.

Cambridge Accounting teachers at Marlbridge

Request a free trial Meet the teachers