Why is "Using the same driver usage for every product" a common mistake in Application of ABC costing?

Why it happens: Copying figures across. How to avoid it: Each product has its OWN usage of each driver — charge it accordingly. Source: 9706 Examiner Reports

Why is "Dividing the pool by one product's usage" a common mistake in Application of ABC costing?

Why it happens: Confusing total with individual. How to avoid it: Cost driver rate uses the TOTAL driver volume; individual usage is for charging products. Source: 9706 Examiner Reports

Why is "Forgetting direct costs in the full cost" a common mistake in Application of ABC costing?

Why it happens: Stopping at overhead. How to avoid it: Full cost = direct costs + ABC overhead per unit; add the direct materials and labour. Source: 9706 Examiner Reports

Why is "Disorganised working" a common mistake in Application of ABC costing?

Why it happens: Many figures, no structure. How to avoid it: Use tables (rates, per-product, comparison) so figures are clear and own-figure marks flow. Source: 9706 Examiner Reports

Why is "Doing the arithmetic without interpreting" a common mistake in Application of ABC costing?

Why it happens: Treating it as a sum. How to avoid it: Interpret the figures and give a recommendation (reprice/redesign/promote/drop). Source: 9706 Examiner Reports

Why is "Saying ABC raises total profit" a common mistake in Application of ABC costing?

Why it happens: Confusing method with decisions. How to avoid it: The method only reallocates cost; total profit is unchanged — gains come from acting on the information. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Application of ABC costing

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Detailed Study Notes

Detailed notes on Activity based costing (ABC) for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Applying ABC — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

Putting ABC to work in full questions. Learn to apply activity based costing end-to-end — building cost pools and driver rates from data, costing several products, comparing with absorption costing, and using the results for pricing and product decisions.

At a glance

An applied ABC question gives overhead data, activities, drivers and product details to work through.
Step 1: build each cost pool and its cost driver rate (pool ÷ total driver volume).
Step 2: charge each product the overhead it causes (rate × usage), per pool.
Step 3: add direct costs for the full cost per unit.
Step 4: often compare with absorption costing and find the profit per unit.
Step 5: use the results to advise on pricing or which products to make/drop.
Lay the work out clearly — a table per product keeps the many figures organised.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

2.2.4 — Apply activity based costing to a full multi-product scenario.
2.2.4 — Compare ABC and absorption costing results and find profit per unit.
2.2.4 — Use ABC results to support pricing and product decisions.

Building the cost pools and rates

Turn the overhead data into a cost driver rate for each activity.

An applied ABC question typically gives you:

the total overhead of each activity (the cost pools);
the cost driver for each activity and its total volume;
for each product: direct costs, output, and its usage of each driver.

Step 1 is to calculate the cost driver rate for each pool:

$\text{Cost driver rate} = \frac{\text{Cost pool}}{\text{Total cost driver volume}}$

Example. Set-ups $120,000 ÷ 600 = $200/set-up; ordering $80,000 ÷ 1,600 = $50/order; inspection $60,000 ÷ 1,200 = $50/inspection.

Setting out the pools and rates clearly at the start makes the rest of the question a matter of multiplying and adding. Take care to use the total driver volume (across all products) in each rate.

Identify cost pools, drivers and total driver volumes from the data.
Cost driver rate = cost pool ÷ total driver volume.
Set out all the rates clearly before costing products.
Use the TOTAL driver volume in each rate.

See the full worked example for application of abc costing →

Costing each product

Charge each product its activity costs, then add direct costs.

Step 2 charges each product the overhead it causes, using its usage of each driver:

$\text{Overhead per product} = \sum (\text{cost driver rate} \times \text{product's driver usage})$

Then divide by units for the overhead per unit, and add direct costs for the full cost per unit.

Example. Product A uses 30 set-ups, 200 orders, 150 inspections, makes 2,000 units, direct cost $18/unit:

overhead = (200 × 30) + (50 × 200) + (50 × 150) = 6,000 + 10,000 + 7,500 = $23,500;
overhead per unit = 23,500 ÷ 2,000 = $11.75;
full cost = 18 + 11.75 = $29.75.

A clear table — one row per activity, columns for rate, usage and cost — keeps the figures organised. Repeat for each product.

Overhead per product = Σ (rate × driver usage).
Overhead per unit = overhead ÷ units.
Full cost per unit = direct costs + overhead per unit.
Use a table per product to organise the figures.

See the full worked example for application of abc costing →

Comparing with absorption costing

Cost the same products by a single rate and compare.

Applied questions often ask you to also cost the products under absorption costing and compare:

Step 3 (absorption): total overhead ÷ total volume (e.g. machine/labour hours) = a single OAR; overhead per unit = OAR × hours per unit; full cost = direct + overhead.

Step 4 (compare): for each product, compare the ABC full cost with the absorption full cost, and the profit per unit (selling price − full cost) under each.

The comparison usually shows low-volume complex products costing more under ABC and high-volume simple products costing less. Presenting the two costs and two profits side by side (e.g. in a table) makes the difference clear and sets up the interpretation that follows.

Absorption: single OAR (total overhead ÷ total hours/units).
Compare ABC and absorption full cost for each product.
Compare profit per unit (selling price − full cost) both ways.
Present side by side for clarity.

See the full worked example for application of abc costing →

Using the results to advise

Turn the figures into pricing and product recommendations.

Step 5 uses the ABC results to advise management:

Pricing — products shown to cost more under ABC may need a price rise; those costing less could be priced more competitively.
Product decisions — a product revealed to be loss-making under ABC might be repriced, redesigned, or dropped; a more profitable product could be promoted.
Cost reduction — target the activities causing the most overhead (e.g. reduce set-ups by larger batches).

A strong applied answer does the arithmetic accurately and then interprets it — explaining why the costs differ (activity usage vs volume) and giving a clear, reasoned recommendation. Remember to note that total profit is unchanged; ABC improves the information for decisions, not the overall profit itself. The marks come from the accurate calculation plus the commercial interpretation.

Use ABC costs to advise on pricing (raise/lower).
Reprice, redesign, drop or promote products as the figures show.
Target the activities driving the most overhead for cost reduction.
Interpret accurately and recommend; total profit is unchanged.

Quick recap

Applied ABC: build cost pools and driver rates, then cost each product by its usage.
Cost driver rate = cost pool ÷ total driver volume.
Overhead per product = Σ(rate × usage); add direct costs for the full cost.
Compare with absorption costing (single OAR) and find profit per unit each way.
Use the results to advise on pricing and product decisions.
Lay the work out in tables; remember total profit is unchanged.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Cost driver rate = cost pool ÷ total driver volume.
Overhead per product = Σ(rate × product's driver usage); full cost = + direct costs.
Compare ABC vs absorption full cost and profit per unit.
Use the results to reprice/redesign/promote/drop; total profit is unchanged.

How it’s examined

Tested on Paper 4 (A Level) as a full applied question: calculate product costs under ABC (and absorption costing), find profit per unit and advise (commonly [10-16] marks). Examiner reports reward organised working, correct own-figure follow-through and a clear recommendation.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 4 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-19.

Take this whole topic with you

Step-by-step worked examples — Application of ABC costing

Step-by-step solutions to past-paper-style questions on application of abc costing, written exactly the way a tutor would explain them at the board.

Question type:

1Build the cost driver rates (5 marks)
Getting startedMulti-step problem• 9706 Paper 4 style• driver rates, AO2
Question
Cost pools: set-ups $120,000 (600 set-ups); ordering$ 80,000 (1,600 orders); inspection $60,000 (1,200 inspections). Calculate the cost driver rate for each. (5 marks)
Step-by-step solution
1. Step 1
  Set-ups = 120,000 ÷ 600 = $200 per set-up.
2. Step 2
  Ordering = 80,000 ÷ 1,600 = $50 per order.
3. Step 3
  Inspection = 60,000 ÷ 1,200 = $50 per inspection.
Answer
Set-ups $200; ordering$ 50; inspection $50.
Examiner tip
Use the TOTAL driver volume in each rate.
2Cost one product (6 marks)
Building confidenceMulti-step problem• ABC, AO2
Question
Using the rates (set-ups $200, orders$ 50, inspections $50), Product A uses 30 set-ups, 200 orders, 150 inspections, makes 2,000 units, direct cost$ 18/unit. Calculate A's full cost per unit. (6 marks)
Step-by-step solution
1. Step 1
  Set-ups = 200 × 30 = 6,000; orders = 50 × 200 = 10,000; inspections = 50 × 150 = 7,500.
2. Step 2
  Total overhead = 6,000 + 10,000 + 7,500 = $23,500.
3. Step 3
  Overhead per unit = 23,500 ÷ 2,000 = $11.75.
4. Step 4
  Full cost = 18 + 11.75 = $29.75.
Answer
Full cost = $29.75 per unit.
Examiner tip
Charge by A's own usage of each driver, sum, divide by units, add direct costs.
3Cost a second product (6 marks)
Building confidenceMulti-step problem• ABC, AO2
Question
Product B uses 70 set-ups, 400 orders, 250 inspections, makes 10,000 units, direct cost $15/unit (rates: set-ups$ 200, orders $50, inspections$ 50). Calculate B's full cost per unit. (6 marks)
Step-by-step solution
1. Step 1
  Set-ups = 200 × 70 = 14,000; orders = 50 × 400 = 20,000; inspections = 50 × 250 = 12,500.
2. Step 2
  Total overhead = 14,000 + 20,000 + 12,500 = $46,500.
3. Step 3
  Overhead per unit = 46,500 ÷ 10,000 = $4.65.
4. Step 4
  Full cost = 15 + 4.65 = $19.65.
Answer
Full cost = $19.65 per unit.
Examiner tip
B is higher volume, so overhead per unit is much lower than A's.
4Cost under absorption costing (5 marks)
Building confidenceMulti-step problem• absorption costing, AO2
Question
Total overhead $260,000; total labour hours 26,000. Product A uses 2 labour hours/unit (direct$ 18); Product B uses 1 labour hour/unit (direct $15). Calculate each product's full cost under absorption costing. (5 marks)
Step-by-step solution
1. Step 1
  OAR = 260,000 ÷ 26,000 = $10 per labour hour.
2. Step 2
  A: overhead = 10 × 2 = 20; full cost = 18 + 20 = $38.
3. Step 3
  B: overhead = 10 × 1 = 10; full cost = 15 + 10 = $25.
Answer
A $38; B$ 25.
Examiner tip
A single OAR shares overhead by labour hours.
5Compare ABC and absorption (5 marks)
StretchMulti-step problem• comparison, AO2
Question
A: absorption $38, ABC$ 29.75. B: absorption $25, ABC$ 19.65. State which method costs each product more and comment. (5 marks)
Step-by-step solution
1. Step 1
  A: absorption $38 > ABC $29.75 — A costs less under ABC (by $8.25).
2. Step 2
  B: absorption $25 > ABC $19.65 — B also costs less under ABC (by $5.35).
3. Step 3
  Here both fall because the example's total ABC overhead charged ($70,000) is less than the absorption overhead — in a full question the totals match and one rises while the other falls.
4. Step 4
  The key point: ABC charges by activities, changing each product's cost from the volume-based figure.
Answer
Both lower here; in a balanced question one product rises and the other falls as ABC redistributes overhead.
Examiner tip
Compare the figures and explain the redistribution by activities.
6Profit per unit each way (5 marks)
StretchMulti-step problem• profit, AO2
Question
Product A sells for $35. Its full cost is$ 38 under absorption costing and $29.75 under ABC. Calculate the profit/loss per unit under each method. (5 marks)
Step-by-step solution
1. Step 1
  Absorption: profit = 35 − 38 = −$3 per unit (a loss).
2. Step 2
  ABC: profit = 35 − 29.75 = +$5.25 per unit.
3. Step 3
  ABC shows A is actually profitable, reversing the absorption-costing conclusion.
Answer
Absorption − $3 (loss); ABC +$ 5.25 (profit).
Examiner tip
The costing method can reverse a product's apparent profitability.
7Advise on a product (5 marks)
StretchWord problem• advice, AO3
Question
ABC reveals that Product C is loss-making at its current price, mainly because it causes a large number of set-ups. Advise the company. (5 marks)
Step-by-step solution
1. Step 1
  Investigate the set-up activity — C causes many set-ups, driving its high cost.
2. Step 2
  Reduce set-ups — e.g. produce C in larger batches less often.
3. Step 3
  Raise C's price so it covers its true cost and a margin (if the market allows).
4. Step 4
  If neither works, discontinue C — unless it has strategic value.
5. Step 5
  Check non-financial factors (customer relationships, product range) before dropping it.
Answer
Reduce set-ups (larger batches), raise the price, or drop C — after weighing non-financial factors.
Examiner tip
Target the activity driving the cost; then reprice/redesign/drop.
8Organise the working (4 marks)
StretchWord problem• presentation, AO2
Question
Describe how to lay out the working for an applied ABC question covering several products and cost pools. (4 marks)
Step-by-step solution
1. Step 1
  First, a small table of cost pools and driver rates.
2. Step 2
  Then, for each product, a table: a row per activity, columns for rate, usage and cost.
3. Step 3
  Sum each product's overhead, divide by units, and add direct costs.
4. Step 4
  Finally, a comparison table of full cost and profit per unit (ABC vs absorption).
Answer
Rates table → per-product activity tables → totals → comparison table.
Examiner tip
Organised working earns method marks and aids own-figure follow-through.
9Cost reduction from ABC (4 marks)
StretchWord problem• cost control, AO3
Question
Using the ABC analysis, explain how a company could reduce the overhead cost of a product. (4 marks)
Step-by-step solution
1. Step 1
  ABC shows which activities drive the product's overhead (e.g. set-ups, orders).
2. Step 2
  Reduce the number of those activities — e.g. fewer, larger production runs (fewer set-ups).
3. Step 3
  Or combine orders to cut ordering activity.
4. Step 4
  Fewer activity events × the driver rate = lower overhead charged.
Answer
Reduce the activities (e.g. fewer set-ups/orders) that ABC shows drive the product's overhead.
Examiner tip
Cost reduction works through the cost drivers ABC identifies.
10Remind on total profit (3 marks)
StretchWord problem• profit, AO3
Question
After applying ABC and changing some product prices, explain what happens to the company's total profit purely from the change in costing method. (3 marks)
Step-by-step solution
1. Step 1
  The change in costing method alone only reallocates overhead between products.
2. Step 2
  It does not change total revenue, total direct costs or total overhead.
3. Step 3
  So total profit is unchanged by the method; any profit change comes from the decisions (e.g. repricing) that follow.
Answer
The method alone leaves total profit unchanged; profit changes only from the decisions ABC informs.
Examiner tip
ABC improves information; profit gains come from acting on it.

Model Answers — Application of ABC costing

High-scoring sample answers for application of abc costing on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 4 style5 marks
Q (5 marks). Calculate the cost driver rates: machine set-ups $150,000 (500 set-ups); purchase ordering$ 96,000 (1,200 orders); quality inspection $84,000 (2,100 inspections).
Model answer
Set-ups = 150,000 ÷ 500 = $300 per set-up. Ordering = 96,000 ÷ 1,200 = $80 per order. Inspection = 84,000 ÷ 2,100 = $40 per inspection.
Why this scores
Marking (point-based, 5). Set-ups $300 (2); ordering$ 80 (1.5); inspection $40 (1.5).
Question 2
9706 Paper 4 style6 marks
Q (6 marks). Using rates (set-ups $300, orders$ 80, inspections $40), Product X uses 25 set-ups, 300 orders and 600 inspections, makes 3,000 units, with direct cost$ 20 per unit. Calculate X's overhead per unit and full cost per unit.
Model answer
Set-ups = 300 × 25 = 7,500; orders = 80 × 300 = 24,000; inspections = 40 × 600 = 24,000. Total overhead = 7,500 + 24,000 + 24,000 = $55,500. Overhead per unit = 55,500 ÷ 3,000 = $18.50. Full cost = 20 + 18.50 = $38.50.
Why this scores
Marking (point-based, 6). Activity charges (3); total $55,500 / per unit$ 18.50 (2); full cost $38.50 (1).
Question 3
9706 Paper 4 style5 marks
Q (5 marks). Total overhead is $330,000 and total machine hours are 33,000. Product X uses 5 machine hours per unit (direct cost$ 20). Calculate X's full cost per unit under absorption costing.
Model answer
OAR = 330,000 ÷ 33,000 = $10 per machine hour. Overhead per unit = 10 × 5 = $50. Full cost = 20 + 50 = $70.
Why this scores
Marking (point-based, 5). OAR $10 (2); overhead$ 50 (2); full cost $70 (1).
Question 4
9706 Paper 4 style8 marks
Q (8 marks). Product X has a full cost of $38.50 under ABC and$ 70 under absorption costing, and sells for $60. Calculate the profit/loss per unit under each method and discuss what the comparison tells management.
Model answer
Profit per unit: Absorption: 60 − 70 = −$10 (loss); ABC: 60 − 38.50 = +$21.50 (profit).

Under absorption costing, X appears loss-making, which might wrongly lead management to drop it or raise its price uncompetitively. ABC, however, reveals that X is actually profitable (+$21.50): being a relatively simple/standard product that uses few activities per unit, it had been over-costed by the volume-based machine-hour rate (5 hours/unit), effectively subsidising more complex products.

The comparison tells management that the absorption-costing figures were misleading and that X is in fact a valuable, profitable product. The company should retain and possibly promote X, and investigate which other (complex) products were being under-costed. It should remember, though, that total profit is unchanged by the costing method — ABC simply gives more accurate per-product information for these decisions.
Why this scores
Marking (point-based, 8). Profits − $10 / +$ 21.50 (3); absorption misleading / X over-costed (2); retain/promote X / total unchanged (3).
Question 5
9706 Paper 4 style8 marks
Q (8 marks). Rates: set-ups $200, orders$ 50, inspections $40. Product P uses 60 set-ups, 200 orders, 500 inspections, makes 8,000 units, direct$ 12/unit. Product Q uses 20 set-ups, 100 orders, 150 inspections, makes 1,000 units, direct $25/unit. Calculate the full cost per unit of P and Q under ABC.
Model answer
Product P: set-ups 200×60=12,000; orders 50×200=10,000; inspections 40×500=20,000; total $42,000. Per unit = 42,000 ÷ 8,000 = $5.25. Full cost = 12 + 5.25 = $17.25. Product Q: set-ups 200×20=4,000; orders 50×100=5,000; inspections 40×150=6,000; total $15,000. Per unit = 15,000 ÷ 1,000 = $15. Full cost = 25 + 15 = $40.
Why this scores
Marking (point-based, 8). P overhead $42,000 / per unit$ 5.25 / full $17.25 (4); Q overhead$ 15,000 / per unit $15 / full$ 40 (4). Note Q (low-volume) carries far more overhead per unit.
Question 6
9706 Paper 4 style6 marks
Q (6 marks). An ABC analysis shows that a low-volume specialist product is loss-making, largely because it requires many machine set-ups. Advise the company on how it might respond.
Model answer
Because the product's high cost is driven by machine set-ups, the company should first see whether it can reduce that activity: producing the specialist product in larger batches less frequently would cut the number of set-ups and therefore its ABC overhead, possibly making it profitable.

If the activity cannot be reduced enough, the company could raise the selling price so that it covers the product's true (ABC) cost plus a margin — provided the market and customers will accept a higher price. It might also redesign the product to simplify production.

If none of these makes the product viable, the company could discontinue it. Before doing so, however, it should consider non-financial factors — for example, whether the specialist product completes a range that helps sell other products, or is needed to retain an important customer — and remember that dropping it removes any contribution it makes towards fixed overheads. So the recommendation is to first reduce set-ups / reprice / redesign, and discontinue only as a last resort after weighing the wider effects.
Why this scores
Marking (point-based, 6). Reduce set-ups (larger batches) (~2); reprice/redesign (~2); discontinue last resort + non-financial factors (~2).
Question 7
9706 Paper 4 style5 marks
Q (5 marks). Product Q has a full cost of $40 under ABC and$ 28 under absorption costing, and sells for $36. Calculate the profit/loss per unit under each method and state what ABC reveals.
Model answer
Absorption: profit = 36 − 28 = +$8 per unit. ABC: profit = 36 − 40 = −$4 per unit (a loss). ABC reveals that Q — a low-volume product causing many activities per unit — is actually loss-making at its current price, even though absorption costing made it appear profitable. The company should consider repricing, redesigning or reviewing Q.
Why this scores
Marking (point-based, 5). Absorption + $8 (2); ABC −$ 4 (2); ABC reveals Q loss-making (1).
Question 8
9706 Paper 4 style4 marks
Q (4 marks). Explain how the information produced by an ABC analysis can help a company to reduce the overhead cost of a particular product.
Model answer
An ABC analysis shows which activities (cost drivers) generate a product's overhead — for example, how many set-ups, orders or inspections it causes. Armed with this, the company can target the most costly activities and reduce the number of times they occur: it might schedule fewer, larger production runs to cut set-ups, consolidate purchases to cut orders, or improve quality to reduce re-inspections. Since the product's overhead = driver rate × number of driver events, fewer events directly reduce its overhead cost — something a single absorption rate would not have revealed.
Why this scores
Marking (point-based, 4). Identifies activities/drivers (2); reduce number of activity events → lower overhead (2).
Question 9
9706 Paper 4 style3 marks
Q (3 marks). Describe how you would set out the working for an applied ABC question involving several products and cost pools.
Model answer
Begin with a short table of the cost pools and their driver rates (pool ÷ total driver volume). Then, for each product, prepare a table with a row per activity and columns for the rate, the product's usage and the resulting cost, summing to the product's overhead, dividing by units, and adding direct costs for the full cost. Finish with a comparison table of full cost and profit per unit (ABC vs absorption). Clear, labelled tables earn method marks and make own-figure follow-through reliable.
Why this scores
Marking (point-based, 3). Rates table (1); per-product tables (1); comparison table (1).
Question 10
9706 Paper 4 style3 marks
Q (3 marks). Explain why simply switching a company's costing system from absorption costing to ABC does not, by itself, increase the company's total profit.
Model answer
Switching the costing method only changes how overhead is allocated between products — it does not alter the company's total revenue, total direct costs or total overhead. The extra cost charged to some products is offset by less charged to others, so total cost and total profit are unchanged. Any improvement in profit comes only from the better decisions (repricing, dropping unprofitable products, etc.) that the more accurate ABC information enables, not from the change of method itself.
Why this scores
Marking (point-based, 3). Only reallocates overhead (1); totals unchanged (1); gains come from decisions (1).

Key Formulae — Application of ABC costing

The formulae you need to memorise for application of abc costing on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Cost driver rate
$Cost\ driver\ rate = \frac{Cost\ pool}{Total\ cost\ driver\ volume}$
$Cost pool$
total overhead of the activity
$Total cost driver volume$
total driver events across all products
When to use
Step 1 of an applied ABC question.
Example
120,000 ÷ 600 = $200 per set-up.
Overhead per product (ABC)
$Overhead = \sum (Cost\ driver\ rate \times Product's\ driver\ usage)$
$Product's driver usage$
the driver events that product causes
When to use
To charge each product its activity costs.
Example
(200×30)+(50×200)+(50×150) = $23,500.
Full cost per unit
$Full\ cost\ per\ unit = Direct\ costs\ per\ unit + \frac{Overhead}{Units}$
$Overhead$
the product's total ABC overhead
$Units$
the product's output
When to use
To find the full cost per unit under ABC.
Example
18 + (23,500 ÷ 2,000) = $29.75.

Key Definitions and Keywords — Application of ABC costing

Definitions to memorise and the exact keywords mark schemes credit for application of abc costing answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Cost pool
Examiner keyword
Total overhead of an activity, given in the question to build a driver rate.
Cost driver rate
Examiner keyword
Cost pool ÷ total driver volume; the overhead rate per driver event.
Driver usage
Examiner keyword
The number of driver events (set-ups, orders, etc.) that a particular product causes.
Full cost per unit
Examiner keyword
Direct costs per unit + ABC overhead per unit.
Overhead absorption rate (OAR)
Examiner keyword
Single rate (total overhead ÷ total hours/units) used for the absorption-costing comparison.
Recommendation
The decision (reprice, redesign, promote, drop) supported by the ABC results in an applied question.

Common Mistakes and Misconceptions — Application of ABC costing

The traps other students keep falling into on application of abc costing questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Using the same driver usage for every product
9706 Examiner Reports
Why it happens
Copying figures across.
How to avoid it
Each product has its OWN usage of each driver — charge it accordingly.
✕Dividing the pool by one product's usage
9706 Examiner Reports
Why it happens
Confusing total with individual.
How to avoid it
Cost driver rate uses the TOTAL driver volume; individual usage is for charging products.
✕Forgetting direct costs in the full cost
9706 Examiner Reports
Why it happens
Stopping at overhead.
How to avoid it
Full cost = direct costs + ABC overhead per unit; add the direct materials and labour.
✕Disorganised working
9706 Examiner Reports
Why it happens
Many figures, no structure.
How to avoid it
Use tables (rates, per-product, comparison) so figures are clear and own-figure marks flow.
✕Doing the arithmetic without interpreting
9706 Examiner Reports
Why it happens
Treating it as a sum.
How to avoid it
Interpret the figures and give a recommendation (reprice/redesign/promote/drop).
✕Saying ABC raises total profit
9706 Examiner Reports
Why it happens
Confusing method with decisions.
How to avoid it
The method only reallocates cost; total profit is unchanged — gains come from acting on the information.

Application of ABC costing

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Build the cost driver rates (5 marks)

2Cost one product (6 marks)

3Cost a second product (6 marks)

4Cost under absorption costing (5 marks)

5Compare ABC and absorption (5 marks)

6Profit per unit each way (5 marks)

7Advise on a product (5 marks)

8Organise the working (4 marks)

9Cost reduction from ABC (4 marks)

10Remind on total profit (3 marks)

Cost driver rate

Overhead per product (ABC)

Full cost per unit

Cost pool

Cost driver rate

Driver usage

Full cost per unit

Overhead absorption rate (OAR)

Recommendation

✕Using the same driver usage for every product

✕Dividing the pool by one product's usage

✕Forgetting direct costs in the full cost

✕Disorganised working

✕Doing the arithmetic without interpreting

✕Saying ABC raises total profit