OxfordAQA A-Level Accounting: Marginal costing (9615) – Revision Notes

For full explanations and longer worked examples, read the marginal costing study guide first.

These notes cover 3.1.10 Marginal costing of the OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards. The specification places 3.1.10 in the International AS content and assesses it on Paper 2. Comparing marginal costing with absorption and activity based costing is 3.2.2, International A-level only. Amounts are in dollars; all businesses are invented.

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The nine terms in the specification

Term	What it means	Quick example
Direct cost	Identified with a specific unit of output	Fabric in a cushion
Indirect cost	Shared by all output; not identified with one unit	Factory cleaning contract
Variable cost	Total moves in step with output; same amount per unit	Packaging for each item
Semi-variable cost	Part fixed, part variable	Machine servicing: annual fee plus a charge per hour run
Fixed cost	Total unchanged within a period and normal range of output	Annual insurance premium
Stepped cost	Constant until a capacity limit, then jumps to a higher level	A second storage unit once the first is full
Marginal cost	Extra cost of producing one more unit (the variable cost per unit)	Clay, glaze and piece-rate pay for one mug
Contribution	Price less marginal cost; also given as a total	Pays the fixed costs first, then forms profit
Break-even	Output where total contribution equals fixed costs	Zero profit, zero loss

Traceability and behaviour are separate labels. A cushion’s fabric is direct and variable; the cleaning contract is indirect and fixed; a machine operator paid a weekly wage could be direct yet fixed. When a question says “classify”, check whether it wants one label or both.

Key formulas

To find	Use
Marginal cost per unit	Variable cost of one unit: materials, labour, direct expenses and variable overheads
Contribution per unit	Selling price per unit − marginal cost per unit
Total contribution	Units sold × contribution per unit, or sales revenue − total variable costs
Profit	Total contribution − fixed costs
Break-even point in units	Fixed costs ÷ contribution per unit
Break-even sales revenue	Break-even units × selling price per unit
Units for a target profit	(Fixed costs + target profit) ÷ contribution per unit, rounded up
Price for a target profit	Marginal cost per unit + (fixed costs + target profit) ÷ expected units
Ranking with a limiting factor	Contribution per unit ÷ quantity of the scarce input used per unit

Fennimore Clocks in five lines

A wall clock sells for 120. Marginal cost is 72. Fixed costs are 43,200 a year. Expected sales: 1,250 clocks.

Contribution per clock = 120 − 72          = 48
Break-even             = 43,200 ÷ 48       = 900 clocks
Break-even revenue     = 900 × 120         = 108,000
Profit at 1,250        = (1,250 × 48) − 43,200 = 16,800
Sales above break-even = 1,250 − 900       = 350 clocks (28% of expected sales)

Profit under marginal costing – layout

Fennimore makes 1,300 clocks and sells 1,250, with no opening inventory.

Sales revenue (1,250 × 120)                 150,000
Variable cost of production (1,300 × 72)     93,600
Less closing inventory (50 × 72)             (3,600)
Variable cost of sales                       90,000
Contribution                                 60,000
Less fixed costs                             43,200
Profit                                       16,800

Remember: closing inventory at marginal cost; fixed costs charged in full to the period.

Benefits and limitations of marginal costing

Benefits	Limitations
Makes contribution visible, product by product	Splitting semi-variable costs can be guesswork
Right basis for short-term decisions: unchanged fixed costs are left out	Marginal-cost pricing can leave fixed costs unrecovered over time
No arbitrary apportionment of fixed overheads	Inventory value leaves out fixed production cost
Profit follows sales volume, so it is easy to explain	Focus on the short term; long-term pricing needs all costs covered

Break-even charts in five checks

1. Output in units runs along the bottom; money runs up the side.
2. Three lines: fixed cost (level), total cost (rising from the fixed cost figure by the variable cost per unit) and revenue (rising from nil by the price).
3. The crossing that matters is revenue with total cost, never revenue with fixed cost. Quote it in units and in dollars.
4. Choose an output and read both lines: revenue minus total cost there is the profit, or a loss if the result is negative.
5. Passing a capacity limit puts a vertical step into both cost lines.

What shifts break-even: up with a lower price, a higher variable cost or higher fixed costs; down with the reverse.

Uses and limitations of break-even analysis

Uses	Limitations
Sets a minimum sales target for the period	Mixed costs have to be split, often by estimate
Models a price rise or a supplier’s increase in advance	Straight lines ignore discounts for bulk buying and price cuts to win volume
Measures the cushion between expected sales and a loss	Fixed costs that step up at higher output are missed
Lets owners and lenders see the picture at a glance	Unsold inventory is not allowed for
Gives the volume required for a chosen profit	A business with many products needs an assumed sales mix
	The answer is no better than the forecasts behind it

Decision situations at a glance

Only amounts that the choice itself would alter belong in the working. An overhead paid under every option drops out. After the figures, add at least one factor that money cannot measure, then decide.

Situation (3.1.10)	Figures to compare	Trap	Non-financial angle
Make or buy	Bought-in price against marginal cost of making, plus fixed costs that buying would end and contribution from freed capacity	Absorbed overheads usually carry on	Can the supplier match finish and delivery dates? Is in-house know-how lost?
Acceptance of additional work	Units × (order price − marginal cost − order-specific costs), less any extra fixed costs	With no spare capacity, subtract contribution on displaced normal sales	Will full-price customers learn of the deal? Might the buyer return?
Price setting	Marginal cost + (fixed costs + target profit) ÷ expected units	Marginal cost is only a short-term floor	Rival prices; whether the volume survives the new price
Optimum use of scarce resources	Contribution ÷ scarce input per unit, ranked; fill demand down the list in whole units	Confirm the input really is short first	Goodwill of customers whose product is cut back
Closing a potentially loss-making line or production department	Contribution given up against avoidable fixed costs, plus income from freed space	Apportioned shared costs stay	Jobs, buyers who purchase across lines, public image
Target profit	(Fixed costs + target profit) ÷ contribution per unit	Round up, and test for a stepped cost at the new volume	Is that volume realistic?

Pairs not to confuse

• Full cost and marginal cost. The first carries absorbed overheads; the second is what changes if one more unit is made.
• Contribution and profit. A department showing a “loss” after its share of overheads may still be earning a healthy contribution.
• Contribution per unit and per unit of scarce input. The first ranks products only when nothing is in short supply.
• Avoidable and unavoidable fixed costs. A closure or a decision to buy in saves the first kind only.
• Semi-variable and stepped. Picture a ramp starting above zero versus a staircase.
• Break-even in units and in dollars. Always write which one you are giving.

Quick self-test

1. A warehouse pays 1,800 a month for each forklift driver, and one driver can move up to 12,000 cartons a month. Classify the cost by behaviour and calculate it for a month of 30,000 cartons.
2. A product sells for 22 and has a marginal cost of 13.50. Calculate contribution per unit.
3. Using question 2, fixed costs are 40,800. Calculate the break-even point in units.
4. Calculate the break-even revenue for question 3.
5. How many units give a profit of 17,000 in question 3?
6. How many units give a profit of 12,000 in question 3?
7. A bracket costs 3.20 in marginal cost to make; a supplier charges 3.60. Buying all 10,000 needed would end a 5,000 tooling lease. What is the effect on profit of buying?
8. In question 2 there is spare capacity. A one-off order for 600 units at 16 needs no extra costs. What is the effect on profit?
9. Skilled labour is short. Product R earns contribution of 18 using 1.5 hours; product S earns 30 using 3 hours. Which takes priority?
10. A department earns contribution of 22,000. Closing it would end 15,000 of fixed costs, and the space could be sublet for 4,000 a year. Calculate the change in profit.
11. Closing inventory is 350 units with a marginal cost of 13.50. Value it under marginal costing.

Answers

1. Stepped. 30,000 cartons need 3 drivers: 3 × 1,800 = 5,400.
2. 22 − 13.50 = 8.50.
3. 40,800 ÷ 8.50 = 4,800 units.
4. 4,800 × 22 = 105,600.
5. (40,800 + 17,000) ÷ 8.50 = 6,800 units.
6. (40,800 + 12,000) ÷ 8.50 = 6,211.8, so 6,212 units (round up).
7. Extra cost 10,000 × 0.40 = 4,000; lease saved 5,000: profit rises by 1,000, before non-financial factors.
8. 600 × (16 − 13.50) = 1,500 higher profit.
9. R: 18 ÷ 1.5 = 12 per hour. S: 30 ÷ 3 = 10 per hour. R first, despite its lower contribution per unit.
10. −22,000 + 15,000 + 4,000: profit falls by 3,000. Keep it open on financial grounds.
11. 350 × 13.50 = 4,725.

Where marks are usually lost

• A make-or-buy comparison that quietly includes absorbed overheads in the cost of making.
• A special order accepted at full capacity with no charge for displaced regular sales.
• Leaving out an order’s own costs, such as logos, extra packaging or delivery.
• Half a product in a limiting-factor schedule: plans use whole units.
• A closure saving that counts overheads which would simply be reshared.
• Break-even or target-profit volumes rounded down, so the target is missed.
• Closing inventory carried at full cost in a marginal costing statement.
• An “advise” or “evaluate” answer that ends without a decision or ignores non-financial points.

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Official syllabus

OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards (OxfordAQA). Section 3.1.10 Marginal costing.