Why is "Saying ABC makes every product more expensive" a common mistake in Effect on cost and profit?

Why it happens: Misunderstanding redistribution. How to avoid it: ABC REDISTRIBUTES overhead — some products cost more, others less; the total is unchanged. Source: 9706 Examiner Reports

Why is "Claiming total firm profit changes under ABC" a common mistake in Effect on cost and profit?

Why it happens: Confusing per-product with total. How to avoid it: Total profit is UNCHANGED; only the allocation of cost (per-product profitability) changes. Source: 9706 Examiner Reports

Why is "Showing the costs but not explaining the difference" a common mistake in Effect on cost and profit?

Why it happens: Stopping at the numbers. How to avoid it: Explain WHY (the product's activity usage relative to volume) and what it MEANS for decisions. Source: 9706 Examiner Reports

Why is "Getting the direction wrong" a common mistake in Effect on cost and profit?

Why it happens: Confusing complex and simple products. How to avoid it: Low-volume COMPLEX → cost MORE under ABC; high-volume SIMPLE → cost LESS. Source: 9706 Examiner Reports

Why is "Comparing only overhead, not full cost" a common mistake in Effect on cost and profit?

Why it happens: Forgetting direct costs. How to avoid it: Compare the FULL cost (direct + overhead) and the profit per unit, not just the overhead. Source: 9706 Examiner Reports

Why is "Not linking the cost change to a decision" a common mistake in Effect on cost and profit?

Why it happens: Treating it as just arithmetic. How to avoid it: State the decision implication — reprice, redesign, promote or drop the product. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Effect on cost and profit

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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.

ABC: Effect on Cost & Profit — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

Comparing the numbers. Learn how activity based costing changes the reported unit cost and profit of each product compared with absorption costing — why low-volume complex products cost more under ABC, and how this affects product profitability.

At a glance

ABC and absorption costing give different unit costs because they share overheads differently.
Low-volume, complex products usually cost more under ABC (they cause more activities).
High-volume, simple products usually cost less under ABC.
The total overhead charged is the same; ABC just redistributes it between products.
Different unit costs → different profit per unit and product profitability.
A product that looks profitable under absorption costing may be loss-making under ABC (or vice versa).
Compare the two by calculating each product's cost both ways and explaining the difference.

What you’ll learn

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

2.2.4 — Compare product costs under ABC and absorption costing.
2.2.4 — Explain the effect of ABC on the reported cost and profit of products.
2.2.4 — Interpret the difference for product decisions.

ABC redistributes the same overhead

Total overhead is unchanged; ABC shares it differently between products.

The total overhead a business incurs is the same whichever method is used — ABC does not change how much overhead there is. What ABC changes is how the overhead is shared between products:

absorption costing shares overhead by a single volume-based rate (e.g. machine hours), so products absorb overhead in proportion to their volume/hours;
ABC shares overhead by the activities each product causes (set-ups, orders, inspections).

So ABC redistributes the same total overhead. A product that causes a lot of activity relative to its volume (typically a low-volume, complex product) absorbs more under ABC; a product that uses few activities relative to its volume (a high-volume, simple product) absorbs less. The gains and losses across products net to zero — it is a redistribution, not an increase.

Total overhead is the same under both methods.
Absorption shares by volume; ABC shares by activities.
ABC redistributes overhead between products.
The changes across products net to zero.

See the full worked example for effect on cost and profit →

Which products cost more or less?

Complex low-volume up; simple high-volume down.

The direction of the change is predictable:

Product type	Under absorption costing	Under ABC
Low-volume, complex (many set-ups/orders per unit)	Under-costed	costs more (true cost shown)
High-volume, simple (few activities per unit)	Over-costed	costs less

This is because a volume-based rate charges overhead in line with how many units are made, so a high-volume product 'soaks up' most of the overhead — subsidising the complex low-volume product, which actually causes a disproportionate share of activities. ABC corrects this by charging each product for the activities it really causes.

So the typical ABC effect is: complex, specialist products become more expensive; standard, high-volume products become cheaper — revealing the true relative costs.

Low-volume complex products: cost MORE under ABC.
High-volume simple products: cost LESS under ABC.
Volume rates let high-volume products subsidise complex ones.
ABC reveals the true relative costs.

See the full worked example for effect on cost and profit →

Effect on profit and profitability

Different unit costs change each product's profit and apparent viability.

Because ABC changes the unit cost, it changes each product's profit per unit and total profit (for a given selling price):

$\text{Profit per unit} = \text{Selling price} - \text{Full cost per unit}$

A product whose cost rises under ABC earns less profit (or makes a loss) than absorption costing suggested.
A product whose cost falls under ABC earns more profit than thought.

This can change product decisions: a complex product that looked profitable under absorption costing may be shown to be loss-making under ABC, prompting a price rise, redesign or discontinuation; a high-volume product shown to be more profitable might be promoted.

Note: the firm's total profit (across all products) is unchanged by switching methods — only the allocation of cost (and hence the reported profitability of each product) changes. ABC affects which products look profitable, not the overall profit.

Profit per unit = selling price − full cost per unit.
Cost up under ABC → less profit (or a loss); cost down → more profit.
Can change make/drop/promote decisions per product.
Total firm profit is unchanged — only the allocation between products changes.

See the full worked example for effect on cost and profit →

Comparing the two methods numerically

Cost each product both ways and explain the difference.

A typical exam task is to calculate a product's cost under both methods and explain the difference. The approach:

Absorption costing: overhead per unit = single OAR × hours per unit (or total overhead ÷ total units); add direct costs.
ABC: overhead per unit = (sum of cost-driver charges) ÷ units; add direct costs.
Compare the two full costs and the resulting profit per unit.
Explain the difference — usually that the product is complex/low-volume (costs more under ABC) or simple/high-volume (costs less).

A strong answer doesn't just show the numbers — it explains why they differ (the product's activity usage relative to its volume) and what it means for pricing and product decisions. That links the calculation to the commercial reality the examiner is testing.

Absorption: OAR × hours (or total ÷ units) + direct costs.
ABC: (sum of driver charges) ÷ units + direct costs.
Compare full costs and profit per unit.
Explain why they differ and what it means for decisions.

Quick recap

Total overhead is the same; ABC redistributes it between products.
Low-volume complex products cost more under ABC; high-volume simple products cost less.
Absorption costing lets high-volume products subsidise complex ones.
Different unit costs change each product's profit and apparent viability.
Total firm profit is unchanged — only the per-product allocation changes.
Compare both methods numerically and explain why the costs differ.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

ABC REDISTRIBUTES the same total overhead — some products up, others down.
Low-volume complex → cost MORE under ABC; high-volume simple → cost LESS.
Profit per unit = selling price − full cost per unit.
Total firm profit is UNCHANGED; only per-product profitability shifts.

How it’s examined

Tested on Paper 4 (A Level): calculate and compare a product's cost/profit under absorption costing and ABC and comment on the difference and its decision implications (commonly [6-12] marks). Examiner reports note candidates not explaining the direction of the change or claiming total profit changes.

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 — Effect on cost and profit

Step-by-step solutions to past-paper-style questions on effect on cost and profit, written exactly the way a tutor would explain them at the board.

Question type:

1Cost under absorption costing (4 marks)
Getting startedMulti-step problem• 9706 Paper 4 style• absorption costing, AO2
Question
Total overhead $600,000; total machine hours 60,000. Product P uses 3 machine hours per unit and has direct costs of$ 14 per unit. Calculate the full cost per unit under absorption costing. (4 marks)
Step-by-step solution
1. Step 1
  Overhead absorption rate = 600,000 ÷ 60,000 = $10 per machine hour.
2. Step 2
  Overhead per unit = 10 × 3 = $30.
3. Step 3
  Full cost = direct 14 + overhead 30 = $44.
Answer
Full cost = $44 per unit.
Examiner tip
Absorption: OAR × hours per unit + direct costs.
2Cost under ABC (5 marks)
Building confidenceMulti-step problem• ABC, AO2
Question
Product P (from the previous example) is charged $48,000 of overhead under ABC and 1,000 units are made. Direct costs are$ 14 per unit. Calculate the full cost per unit under ABC. (5 marks)
Step-by-step solution
1. Step 1
  ABC overhead per unit = 48,000 ÷ 1,000 = $48.
2. Step 2
  Full cost = direct 14 + overhead 48 = $62.
3. Step 3
  (So P costs $62 under ABC vs $44 under absorption — $18 more.)
Answer
Full cost = $62 per unit (vs$ 44 under absorption costing).
Examiner tip
ABC: (sum of driver charges) ÷ units + direct costs.
3ABC redistributes overhead (4 marks)
Building confidenceWord problem• redistribution, AO3
Question
Explain why, when a business switches to ABC, some products cost more and others cost less, but the total overhead is unchanged. (4 marks)
Step-by-step solution
1. Step 1
  The total overhead the business incurs is the same — ABC does not change it.
2. Step 2
  ABC only changes how the overhead is shared between products.
3. Step 3
  Products causing more activity absorb more; those causing less absorb less.
4. Step 4
  So the increases and decreases across products net to zero — a redistribution.
Answer
ABC redistributes the same total overhead — some products up, some down, netting to zero.
Examiner tip
Total overhead unchanged; only the split changes.
4Which products cost more? (4 marks)
Building confidenceWord problem• direction, AO2
Question
State, with a reason, which products tend to cost more under ABC and which cost less. (4 marks)
Step-by-step solution
1. Step 1
  Low-volume, complex products cost more — they cause many activities (set-ups, orders) per unit.
2. Step 2
  High-volume, simple products cost less — they cause few activities per unit.
3. Step 3
  A volume-based rate had let the high-volume product subsidise the complex one.
4. Step 4
  ABC charges each for the activities it really causes.
Answer
Low-volume complex up; high-volume simple down — ABC stops the cross-subsidy.
Examiner tip
Predict the direction from volume vs activity usage.
5Effect on profit per unit (4 marks)
StretchMulti-step problem• profit, AO2
Question
Product P sells for $55. Calculate the profit per unit under absorption costing (cost$ 44) and under ABC (cost $62), and comment. (4 marks)
Step-by-step solution
1. Step 1
  Absorption: profit = 55 − 44 = $11 per unit (appears profitable).
2. Step 2
  ABC: profit = 55 − 62 = −$7 per unit (a loss).
3. Step 3
  ABC reveals P is actually loss-making at $55.
4. Step 4
  The firm should consider a price rise, redesign or dropping P.
Answer
Absorption + $11; ABC −$ 7 — ABC shows P is loss-making, changing the decision.
Examiner tip
Different cost → different profit → possibly different decision.
6The other product gains (4 marks)
StretchMulti-step problem• profit, AO2
Question
Product Q (high-volume, simple) cost $30 under absorption costing but$ 24 under ABC, and sells for $33. Calculate the profit per unit both ways and comment. (4 marks)
Step-by-step solution
1. Step 1
  Absorption: profit = 33 − 30 = $3 per unit (looks barely profitable).
2. Step 2
  ABC: profit = 33 − 24 = $9 per unit.
3. Step 3
  Q is more profitable than absorption costing suggested.
4. Step 4
  Q was over-costed (subsidising the complex product); the firm could promote Q.
Answer
Absorption + $3; ABC +$ 9 — Q is more profitable than thought, so it could be promoted.
Examiner tip
High-volume products often look better under ABC.
7Total profit unchanged (4 marks)
StretchWord problem• profit, AO3
Question
Explain why switching from absorption costing to ABC does not change the company's total profit, even though individual product profits change. (4 marks)
Step-by-step solution
1. Step 1
  Total overhead, revenue and direct costs are the same under both methods.
2. Step 2
  ABC only reallocates overhead between products.
3. Step 3
  Extra cost on one product is offset by less cost on another.
4. Step 4
  So total cost and total profit are unchanged — only per-product profit shifts.
Answer
ABC only reallocates overhead; total cost and total profit are unchanged.
Examiner tip
Total profit is fixed; ABC changes the per-product picture only.
8Full comparison (6 marks)
StretchMulti-step problem• comparison, AO2
Question
Product R: direct costs $20/unit; absorption overhead$ 25/unit; ABC overhead $40/unit; selling price$ 50. Calculate the full cost and profit per unit under each method. (6 marks)
Step-by-step solution
1. Step 1
  Absorption full cost = 20 + 25 = $45; profit = 50 − 45 = $5.
2. Step 2
  ABC full cost = 20 + 40 = $60; profit = 50 − 60 = −$10.
3. Step 3
  R appears profitable ($5) under absorption but loss-making (−$10) under ABC.
Answer
Absorption: cost $45, profit$ 5; ABC: cost $60, loss$ 10.
Examiner tip
Show both full costs and both profits, then interpret.
9Decision implication (4 marks)
StretchWord problem• decision, AO3
Question
Under ABC, a specialist product is found to be loss-making whereas absorption costing showed a profit. Suggest two actions the company could take. (4 marks)
Step-by-step solution
1. Step 1
  Raise the selling price so it covers the true (ABC) cost and a margin.
2. Step 2
  Redesign the product or process to reduce the activities (e.g. fewer set-ups) it causes.
3. Step 3
  Discontinue the product if it cannot be made profitable.
4. Step 4
  (Or accept the loss only if the product brings other strategic benefits.)
Answer
Raise the price, redesign to cut activities, or discontinue the product.
Examiner tip
Accurate costs lead to concrete actions.
10Explain the cost difference (4 marks)
StretchWord problem• interpretation, AO3
Question
A low-volume product costs $44 under absorption costing but$ 62 under ABC. Explain why ABC gives the higher figure. (4 marks)
Step-by-step solution
1. Step 1
  Being low-volume, the product was charged little overhead by a volume-based rate.
2. Step 2
  But it causes many activities (set-ups, orders, inspections) per unit.
3. Step 3
  ABC charges it for the activities it actually causes, which is far more.
4. Step 4
  So ABC reveals its true, higher cost ($62) that absorption costing understated ($44).
Answer
It causes many activities per unit, which ABC charges fully — absorption's volume rate under-costed it.
Examiner tip
Tie the higher ABC cost to high activity usage relative to volume.

Model Answers — Effect on cost and profit

High-scoring sample answers for effect on cost and profit 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). Product A has direct costs of $18 per unit. Its overhead is$ 22 per unit under absorption costing and $34 per unit under ABC. Calculate the full cost per unit under each method and the difference.
Model answer
Absorption: full cost = 18 + 22 = $40. ABC: full cost = 18 + 34 = $52. The product costs $12 more per unit under ABC.
Why this scores
Marking (point-based, 5). Absorption $40 (2); ABC$ 52 (2); difference $12 (1).
Question 2
9706 Paper 4 style4 marks
Q (4 marks). Product A sells for $48. Using the full costs from the previous question ($ 40 absorption, $52 ABC), calculate the profit or loss per unit under each method.
Model answer
Absorption: profit = 48 − 40 = $8 per unit. ABC: profit = 48 − 52 = −$4 per unit (a loss).
Why this scores
Marking (point-based, 4). Absorption + $8 (2); ABC −$ 4 (2).
Question 3
9706 Paper 4 style4 marks
Q (4 marks). Explain which type of product tends to cost more, and which less, when a company moves from absorption costing to ABC.
Model answer
Low-volume, complex products (those that cause many activities — set-ups, orders, inspections — per unit) tend to cost more under ABC, because ABC charges them for the activities they actually cause. High-volume, simple products tend to cost less, because under absorption costing's volume-based rate they had been over-costed and effectively subsidising the complex products. ABC corrects this cross-subsidy.
Why this scores
Marking (point-based, 4). Low-volume complex cost more + reason (2); high-volume simple cost less + reason (2).
Question 4
9706 Paper 4 style5 marks
Q (5 marks). Explain why moving to ABC changes the cost of individual products but not the total overhead of the business.
Model answer
The total overhead a business incurs is determined by its activities and spending, and it is the same amount regardless of how it is shared out — switching to ABC does not create or remove any overhead. What ABC changes is the basis of allocation: instead of a single volume-based rate, it charges each product for the activities (cost drivers) it causes.

As a result, products that cause a lot of activity (typically low-volume, complex ones) are charged more, while products that cause little activity relative to their volume are charged less. These increases and decreases offset one another, so although individual product costs change, the total overhead — and total cost — is unchanged. ABC is a redistribution, not an increase, of cost.
Why this scores
Marking (point-based, 5). Total overhead fixed (~2); ABC changes the allocation basis (~2); increases offset decreases (~1).
Question 5
9706 Paper 4 style8 marks
Q (8 marks). Product Z: direct costs $25 per unit; selling price$ 60. Under absorption costing it is charged $20 of overhead per unit. Under ABC it is charged total overhead of$ 60,000 for 1,500 units. Calculate the full cost and profit per unit under each method, and comment on the result.
Model answer
Absorption: full cost = 25 + 20 = $45; profit = 60 − 45 = $15 per unit. ABC: overhead per unit = 60,000 ÷ 1,500 = $40; full cost = 25 + 40 = $65; profit = 60 − 65 = −$5 per unit (a loss).

Comment: absorption costing makes Z appear profitable (+$15), but ABC reveals it is actually loss-making (−$5). Z is evidently a complex/low-volume product that causes a disproportionate share of activities, which the absorption rate under-charged. The company should consider raising Z's price, redesigning it to cause fewer activities, or discontinuing it. (Note the firm's total profit is unchanged — only Z's reported profitability has shifted.)
Why this scores
Marking (point-based, 8). Absorption cost/profit $45/$ 15 (2); ABC overhead $40 / cost$ 65 / loss $5 (3); comment — Z really loss-making / actions / total unchanged (3).
Question 6
9706 Paper 4 style4 marks
Q (4 marks). A director claims that adopting ABC will increase the company's total profit. Explain why this claim is incorrect.
Model answer
Adopting ABC does not change the company's revenue, direct costs or total overhead — it only changes the way overhead is allocated between products. The extra cost charged to some products is exactly offset by the reduced cost charged to others, so the total cost is unchanged and therefore total profit is unchanged. ABC changes the reported profitability of individual products (which can improve decision-making), but it cannot increase the firm's overall profit by itself.
Why this scores
Marking (point-based, 4). Revenue/total cost unchanged (2); only reallocates / per-product changes (2).
Question 7
9706 Paper 4 style6 marks
Q (6 marks). Under ABC, a company finds that one of its specialist products, previously thought profitable, is actually loss-making, while a standard product is more profitable than believed. Discuss how this information should affect the company's decisions.
Model answer
The more accurate ABC costs reveal that the company's earlier decisions were based on distorted absorption-costing figures.

For the specialist product (now loss-making), the company should investigate the activities it causes (set-ups, orders, inspections) and consider: raising its selling price so it covers its true cost and a margin; redesigning the product or process to reduce the activities it requires; or, if it cannot be made profitable, discontinuing it (unless it is retained for strategic reasons, such as completing a product range or keeping a key customer).

For the standard product (more profitable than believed), the company might promote it more actively, increase its output, or use the headroom to compete on price, since it generates more profit than previously thought.

However, the company should act with care: ABC costs are still estimates dependent on the chosen drivers, non-financial factors (customer relationships, product range, market position) matter, and total profit is unchanged by the costing method — so the value of ABC lies in better-informed product decisions, not in any automatic increase in profit.
Why this scores
Marking (point-based, 6). Specialist — reprice/redesign/drop (~2); standard — promote/expand (~2); caveats — estimates/non-financial/total unchanged (~2).
Question 8
9706 Paper 4 style4 marks
Q (4 marks). A high-volume product costs $38 under absorption costing but only$ 30 under ABC. Explain why ABC produces the lower figure.
Model answer
Because the product is high-volume, a volume-based absorption rate charged it a large share of overhead — in effect making it absorb overhead that was actually caused by other, more complex products. The high-volume product, however, is simple and causes relatively few activities per unit. Under ABC, it is charged only for the activities it actually causes, which is less, so its cost falls to $30. ABC removes the cross-subsidy the volume-based rate had imposed, revealing the product's true, lower cost.
Why this scores
Marking (point-based, 4). Volume rate over-charged it (2); causes few activities / ABC charges only those (1); removes cross-subsidy (1).
Question 9
9706 Paper 4 style4 marks
Q (4 marks). Product Q cost $32 under absorption costing and$ 26 under ABC, and sells for $35. Calculate the profit per unit under each method and state what action the company might consider.
Model answer
Absorption: profit = 35 − 32 = $3 per unit. ABC: profit = 35 − 26 = $9 per unit. ABC shows Q is considerably more profitable than absorption costing suggested (it was being over-costed). The company might promote Q more heavily, increase its output, or use the margin to price more competitively to win extra sales.
Why this scores
Marking (point-based, 4). Profit $3 /$ 9 (2); action — promote/expand/price (2).
Question 10
9706 Paper 4 style3 marks
Q (3 marks). Explain what is meant by 'cross-subsidy' in the context of comparing absorption costing and ABC.
Model answer
Cross-subsidy occurs under absorption costing when, because overhead is shared by a volume-based rate, high-volume, simple products are charged more overhead than they truly cause, while low-volume, complex products are charged less than they cause. In effect the high-volume products subsidise the complex ones. ABC removes this cross-subsidy by charging each product for the activities it actually causes.
Why this scores
Marking (point-based, 3). High-volume over-charged (1); complex under-charged (1); ABC removes it (1).

Key Formulae — Effect on cost and profit

The formulae you need to memorise for effect on cost and profit on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Profit per unit
$Profit\ per\ unit = Selling\ price - Full\ cost\ per\ unit$
$Selling price$
price per unit
$Full cost per unit$
direct costs + overhead per unit (absorption OR ABC)
When to use
To compare profit per unit under each costing method.
Example
55 − 62 = − $7 (ABC); 55 − 44 =$ 11 (absorption).
ABC overhead per unit
$ABC\ overhead\ per\ unit = \frac{Sum\ of\ cost\ driver\ charges}{Units\ produced}$
$Sum of cost driver charges$
total overhead charged to the product under ABC
$Units produced$
the product's output
When to use
To find the ABC overhead per unit for comparison.
Example
48,000 ÷ 1,000 = $48.

Key Definitions and Keywords — Effect on cost and profit

Definitions to memorise and the exact keywords mark schemes credit for effect on cost and profit answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Overhead redistribution
Examiner keyword
ABC reallocates the same total overhead between products; the firm's total cost is unchanged.
Cross-subsidy
Examiner keyword
Under absorption costing, high-volume products bearing overhead that low-volume complex products actually cause.
Full cost per unit
Examiner keyword
Direct costs + overhead per unit; differs between absorption costing and ABC.
Profit per unit
Examiner keyword
Selling price − full cost per unit; changes when the costing method changes the unit cost.
Product profitability
Examiner keyword
How profitable each product appears; ABC can change it (and decisions) even though total profit is fixed.
Low-volume complex product
A product causing many activities per unit; usually costs more under ABC.

Common Mistakes and Misconceptions — Effect on cost and profit

The traps other students keep falling into on effect on cost and profit questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Saying ABC makes every product more expensive
9706 Examiner Reports
Why it happens
Misunderstanding redistribution.
How to avoid it
ABC REDISTRIBUTES overhead — some products cost more, others less; the total is unchanged.
✕Claiming total firm profit changes under ABC
9706 Examiner Reports
Why it happens
Confusing per-product with total.
How to avoid it
Total profit is UNCHANGED; only the allocation of cost (per-product profitability) changes.
✕Showing the costs but not explaining the difference
9706 Examiner Reports
Why it happens
Stopping at the numbers.
How to avoid it
Explain WHY (the product's activity usage relative to volume) and what it MEANS for decisions.
✕Getting the direction wrong
9706 Examiner Reports
Why it happens
Confusing complex and simple products.
How to avoid it
Low-volume COMPLEX → cost MORE under ABC; high-volume SIMPLE → cost LESS.
✕Comparing only overhead, not full cost
9706 Examiner Reports
Why it happens
Forgetting direct costs.
How to avoid it
Compare the FULL cost (direct + overhead) and the profit per unit, not just the overhead.
✕Not linking the cost change to a decision
9706 Examiner Reports
Why it happens
Treating it as just arithmetic.
How to avoid it
State the decision implication — reprice, redesign, promote or drop the product.

Effect on cost and profit

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Cost under absorption costing (4 marks)

2Cost under ABC (5 marks)

3ABC redistributes overhead (4 marks)

4Which products cost more? (4 marks)

5Effect on profit per unit (4 marks)

6The other product gains (4 marks)

7Total profit unchanged (4 marks)

8Full comparison (6 marks)

9Decision implication (4 marks)

10Explain the cost difference (4 marks)

Profit per unit

ABC overhead per unit

Overhead redistribution

Cross-subsidy

Full cost per unit

Profit per unit

Product profitability

Low-volume complex product

✕Saying ABC makes every product more expensive

✕Claiming total firm profit changes under ABC

✕Showing the costs but not explaining the difference

✕Getting the direction wrong

✕Comparing only overhead, not full cost

✕Not linking the cost change to a decision