Study Guides

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

A study guide to cost classification, inventory valuation, absorption and marginal costing and break-even analysis for Cambridge AS & A Level 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

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This guide covers sections 2.1 Costs and cost behaviour and 2.2 Traditional costing methods of the Cambridge International AS & A Level Accounting 9706 syllabus for examination in 2026, 2027 and 2028. Both sections are AS Level content. The syllabus says Paper 1 has eight questions on cost and management accounting, Question 4 of Paper 2 focuses on it (30 marks), and Paper 4 assumes this AS content. All businesses and figures below are invented and all amounts are in dollars.

Use it with the revision notes and the practice questions. See also the course hub, the checklist, the free diagnostics and the exam preparation guide.

What is covered

Syllabus point	Where
2.1.1 Costs, materials and labour, inventory, JIT	1 to 3
2.2.1 Unit, job and batch costing	4, 5
2.2.2 Absorption costing	5
2.2.3 and 2.2.4 Marginal costing, decisions, CVP	6, 7

1. Classifying costs, materials and labour

Costs are classified by traceability and behaviour. A direct cost can be traced to a cost unit: direct materials, direct labour and direct expenses. Together they make the prime cost. An indirect cost (overhead) cannot be traced economically to one unit. On behaviour, a fixed cost stays the same as output changes (within a range), a variable cost changes in proportion to output, a semi-variable cost has a fixed and a variable part, and a stepped cost is fixed until output passes a threshold, then jumps.

Whinfell Cycles made 400 bicycles in a month.

Cost	Class	Amount
Frames and wheels, 85 per bike	Direct material, variable	34,000
Assemblers, 3 hours at 14 per bike	Direct labour, variable	16,800
Prime cost		50,800
Lubricants and cleaning materials	Indirect material	1,200
Workshop supervisor	Indirect labour, fixed	3,000
Workshop rent, insurance	Indirect expense, fixed	5,600
Production overheads		9,800
Production cost (60,600 / 400 = 151.50 per bike)		60,600

Semi-variable. Power cost 4,150 at 300 bikes and 4,950 at 500. Variable cost per bike = (4,950 − 4,150) / (500 − 300) = 4.00. Fixed part = 4,150 − 300 × 4.00 = 2,950. At 400 bikes: 2,950 + 1,600 = 4,550.

Stepped. One inspector (2,100 a month) is needed per 250 bikes or part of 250: 400 bikes cost 2 × 2,100 = 4,200; 520 bikes cost 3 × 2,100 = 6,300.

Accounting for labour. Gross wages are split into direct labour (time spent on units or jobs) and indirect labour (supervision, cleaning). An assembler works 40 hours at 14 and 5 overtime hours at time-and-a-half (21): 560 + 105 = 665. Overtime caused by one customer’s rush job is usually charged to that job; general overtime is an overhead.

Accounting for materials. Issues from inventory are charged to a unit or job if direct, or to overheads if indirect, at a value set by the inventory method.

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.

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.

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. Valuing inventory: FIFO and AVCO

FIFO assumes the oldest items are issued first, so closing inventory is the newest purchases. AVCO uses a weighted average cost. Under the periodic method, inventory is counted at the end of the period and valued once. Under the perpetual method, a record is updated after every receipt and issue.

Dunnock Pumps: opening 100 units at 12; buys 200 at 13 (5 March); issues 150 (12 March); buys 100 at 14 (18 March); issues 150 (25 March). Closing inventory is 100 units.

Periodic FIFO. Closing 100 × 14 = 1,400.
Periodic AVCO. Total cost 1,200 + 2,600 + 1,400 = 5,200 for 400 units, an average of 13.00. Closing is 1,300.
Perpetual FIFO. The first issue takes 100 at 12 and 50 at 13 (1,850); the second takes 150 at 13 (1,950). Closing is 100 at 14 = 1,400, as in periodic FIFO.
Perpetual AVCO. After 5 March: 300 units worth 3,800, average 12.67; the issue costs 1,900, leaving 150 worth 1,900. After 18 March: 250 units worth 3,300, average 13.20; the issue costs 1,980, leaving 100 worth 1,320.

Method	Closing inventory	Cost of issues
FIFO (periodic and perpetual)	1,400	3,800
AVCO periodic	1,300	3,900
AVCO perpetual	1,320	3,880

Cost of issues = 5,200 minus closing inventory. With rising prices FIFO gives the highest 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.

3. Just in time (JIT)

JIT management of inventory means materials arrive close to when production needs them, in small frequent deliveries, so little inventory is held. It relies on reliable suppliers and accurate planning. Benefits: lower storage costs, less cash tied up, less damage or obsolescence. Risks: a late delivery stops production, bulk discounts are lost, and ordering and delivery costs rise. It needs reliable suppliers and predictable demand.

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).

4. Costing applications: unit, job and batch

Unit costing suits identical output or a repeated service. Cost per unit = total cost / units.
Job costing suits work done to a customer’s specification. Costs are collected for each job and a price is set from the total.
Batch costing suits groups of identical items made together. Cost per item = batch cost / items in the batch.

Each applies in manufacturing and services. Marstow Physiotherapy gave 740 sessions at a cost of 27,000 salaries, 4,500 rent and utilities and 1,800 consumables: 33,300 / 740 = 45.00 per session (unit costing, service). Gledhow Bakery baked 250 loaves: ingredients 150, labour 4 hours at 15 = 60, overhead 4 hours at 7.50 = 30. Batch cost 240; cost per loaf 0.96. Job costing is worked in Section 5.

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.

5. Absorption costing

A cost centre is a department, process or location for which costs are collected. A cost unit is the unit of product or service to which costs are charged. Overheads are allocated when they belong wholly to one centre and apportioned when shared on a fair basis (floor area for rent, machine value for insurance). Service department costs are then reapportioned to production departments.

Aldwick Joinery has production departments Cutting and Assembly and service departments Stores and Maintenance.

Overhead	Basis	Total	Cutting	Assembly	Stores	Maintenance
Rent	Floor area	36,000	18,000	9,000	6,000	3,000
Insurance	Machine value	8,000	4,800	2,400	400	400
Indirect labour	Allocated	41,000	14,400	11,400	6,600	8,600
Subtotal		85,000	37,200	22,800	13,000	12,000
Stores (60:40 requisitions)			7,800	5,200	(13,000)
Maintenance (75:25 hours)			9,000	3,000		(12,000)
Total		85,000	54,000	31,000

An overhead absorption rate (OAR) is budgeted overhead divided by budgeted activity, on the basis that reflects why the overhead is incurred. Cutting uses machine hours (budget 4,500): 54,000 / 4,500 = 12.00. Assembly uses direct labour hours (budget 6,200): 31,000 / 6,200 = 5.00.

Job 51 (a kitchen island): materials 1,860; labour 10 hours in Cutting and 40 in Assembly at 15 = 750; overhead 30 machine hours × 12 = 360 plus 40 labour hours × 5 = 200. Total cost 3,170. A 30% mark-up (951) gives a price of 4,121.

Under and over absorption. Cutting used 4,700 machine hours and spent 55,300 (budget 54,000). Overhead absorbed = 4,700 × 12 = 56,400, which exceeds actual by 1,100, so overhead is over-absorbed. If absorbed were lower than actual it would be under-absorbed. Causes: activity differs from budget (here +200 hours × 12 = 2,400 extra absorbed) and spending differs from budget (here 1,300 extra); net 2,400 − 1,300 = 1,100. The difference is adjusted in the statement of profit or loss: over-absorption raises profit, under-absorption lowers it.

Uses of absorption costing: a full cost per unit for pricing, inventory valued at full production cost, overheads spread across products. Limitations: apportionment bases are subjective; fixed overheads behave as if variable per unit; profit moves with inventory levels. Decision support: full cost helps set a long-run price but can mislead when only some costs change.

Non-financial factors matter in every costing decision: quality, customer relationships, employee morale, supplier reliability, reputation, environmental impact and capacity. A choice that looks best on the numbers can fail on these.

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.

6. Marginal costing and break-even analysis

Contribution = selling price − variable cost per unit. Fixed costs are a period cost, charged in full to the period, and inventory is valued at variable cost only.

Wyncombe Toys sells a product at 40 (variable cost 24) with fixed costs of 48,000. Contribution is 16.

Break-even point = 48,000 / 16 = 3,000 units (revenue 120,000).
Contribution to sales (C/S) ratio = 16 / 40 = 40%; break-even revenue = 48,000 / 0.40 = 120,000.
Target profit 20,000: units = (48,000 + 20,000) / 16 = 4,250.
Budgeted sales 4,000 units: margin of safety = 4,000 − 3,000 = 1,000 units (25% of budget, or 40,000 of revenue).

Reading a break-even chart (the syllabus says you will not be asked to prepare one). The revenue line starts at the origin; the total cost line starts at the fixed cost on the vertical axis. They cross at break-even. Left of it is a loss, right of it a profit. The margin of safety is the horizontal distance from break-even to budgeted output.

Limitations of break-even analysis: it assumes constant price and variable cost per unit, fixed costs that stay fixed, a single product or constant sales mix, and production equal to sales.

Absorption versus marginal profit. Pellwood Candles sells at 25 with variable cost 11. Fixed production overhead of 36,000 is absorbed at 6 per unit on normal output of 6,000; non-production overhead is 20,000. It makes 6,000 units in both months and sells 5,000 then 7,000.

Month 1	Absorption	Marginal
Sales	125,000	125,000
Cost of sales	(85,000) at 17	(55,000) at 11
Fixed costs charged	(20,000)	(56,000)
Profit	20,000	14,000

Month 2 gives 36,000 (absorption) and 42,000 (marginal). The difference is the change in inventory units × fixed overhead per unit. Reconciliation: marginal profit, plus fixed overhead carried in closing inventory, less fixed overhead brought in with opening inventory, equals absorption profit. Month 1: 14,000 + 6,000 (1,000 units × 6) = 20,000. Month 2: 42,000 − 6,000 = 36,000.

Uses of marginal costing: it shows contribution by product, supports short-run decisions and keeps profit free of inventory effects. Limitations: prices may fail to cover fixed costs, costs must be split into fixed and variable, and inventory is not at 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.

7. Decisions and cost-volume-profit (CVP) analysis

Use relevant costs: only future costs that change with the decision.

Decision	Rule
Make or buy	Compare variable plus avoidable fixed cost of making with the purchase price
Special order	Accept if price exceeds variable cost and capacity is spare
Closure of a business unit	Compare its contribution with its avoidable fixed costs
Limiting factor	Rank by contribution per unit of the scarce resource
Target profit	Units = (fixed costs + target) / contribution per unit

Cragmoor Garden Tools: product X contributes 18 and uses 2 machine hours; Y contributes 20 and uses 4 hours. Only 6,000 hours exist; demand is 2,000 X and 1,500 Y. Contribution per hour: X 9, Y 5. Make 2,000 X (4,000 hours), then 2,000 / 4 = 500 Y. Contribution = 36,000 + 10,000 = 46,000.

CVP analysis studies how costs, volume and profit move together. Advantages: it is quick, shows the effect of price or volume changes and supports target profit planning. Limitations: the assumptions in Section 6 rarely hold exactly, and it ignores non-financial factors. Finish decisions with a recommendation supported by reasons for and against.

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.

Common errors

Not recalculating the average after each receipt in perpetual AVCO.
Dividing fixed costs by selling price, not contribution per unit.
Ranking by contribution per unit, not per unit of the scarce resource.

Frequently asked questions

What is the difference between FIFO and AVCO? FIFO assumes the oldest items are issued first, so closing inventory is valued at the newest purchase prices. AVCO values issues and closing inventory at a weighted average cost, which in the perpetual method is recalculated after each receipt. With rising prices, FIFO gives the highest profit.

Do I have to draw a break-even chart for Cambridge 9706? No. The syllabus says you will not be asked to prepare a break-even chart, but you should be able to read and interpret one.

How do you calculate the margin of safety? Margin of safety = budgeted sales − break-even sales. It can be given in units, revenue or as a percentage of budgeted sales.

Why do absorption and marginal costing give different profits? Absorption costing carries some fixed production overhead in closing inventory, while marginal costing charges it all in the period. The difference equals the change in inventory units × fixed overhead per unit.

What is just in time inventory management? Under just in time (JIT), materials arrive close to when production needs them, in small, frequent deliveries, so little inventory is held.

Official syllabus

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

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