Why is "Valuing inventory inconsistently with the method" a common mistake in Marginal Costing and Profit Statements?

Why it happens: Mixing the two layouts. How to avoid it: Marginal inventory = VARIABLE cost; absorption inventory = FULL production cost. Be consistent throughout. Source: 9706 Examiner Reports

Why is "Forgetting the under/over-absorption line in the absorption statement" a common mistake in Marginal Costing and Profit Statements?

Why it happens: Stopping at gross profit. How to avoid it: After gross profit, adjust for under-absorption (charge) or over-absorption (credit) before non-production costs. Source: 9706 Examiner Reports

Why is "Deducting fixed costs before contribution" a common mistake in Marginal Costing and Profit Statements?

Why it happens: Treating fixed costs as part of cost of sales in a marginal statement. How to avoid it: In a marginal statement, deduct ONLY variable costs to reach contribution; fixed costs come after. Source: 9706 Examiner Reports

Why is "Getting the profit-difference direction wrong" a common mistake in Marginal Costing and Profit Statements?

Why it happens: Forgetting which method carries fixed cost in inventory. How to avoid it: Inventory RISES → absorption HIGHER; inventory FALLS → absorption LOWER; unchanged → equal. Source: 9706 Examiner Reports

Why is "Using actual fixed cost per unit for the bridge" a common mistake in Marginal Costing and Profit Statements?

Why it happens: Dividing actual fixed cost by units produced. How to avoid it: Use the PREDETERMINED fixed OAR (budgeted fixed overhead ÷ budgeted units) × change in inventory. Source: 9706 Examiner Reports

Why is "Including selling costs in inventory valuation" a common mistake in Marginal Costing and Profit Statements?

Why it happens: Treating all costs as product costs. How to avoid it: Only PRODUCTION costs are carried in inventory; selling/admin costs are period costs in both methods. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Marginal Costing and Profit Statements

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Detailed Study Notes

Detailed notes on Marginal Costing for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Marginal & Absorption Costing Profit Statements — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

Preparing profit statements both ways. Learn the marginal-costing layout (sales − variable costs = contribution − fixed costs = profit) and the absorption-costing layout (with valued inventory and an under/over-absorption adjustment), and why the two profits differ when inventory changes.

At a glance

Marginal-costing statement: Sales − variable cost of sales = contribution; − fixed costs = profit.
Inventory under marginal costing is valued at variable production cost only.
Absorption-costing statement: Sales − full cost of sales (incl. absorbed fixed overhead) = gross profit.
Inventory under absorption costing is valued at full production cost (incl. fixed overhead).
Absorption statements include an under/over-absorption adjustment.
If inventory rises, absorption profit > marginal profit; if it falls, absorption profit < marginal.
The difference = fixed overhead in the change in inventory (fixed OAR × change in units).

What you’ll learn

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

2.2.3 — Prepare a profit statement using marginal costing.
2.2.2/2.2.3 — Prepare a profit statement using absorption costing.
Explain why the two profit figures differ when inventory levels change.

The marginal-costing profit statement

Sales minus variable costs gives contribution; minus fixed costs gives profit.

Under marginal costing, the profit statement is built around contribution:

Marginal-costing statement	$
Sales revenue	X
less Variable cost of sales*	(X)
= Contribution	X
less Fixed costs (production + non-production)	(X)
= Profit	X

*Variable cost of sales = opening inventory (at variable cost) + variable production cost − closing inventory (at variable cost). Add variable selling/distribution costs if given.

Key points:

Inventory is valued at variable production cost only.
All fixed costs are deducted in full as a period cost — none is carried in inventory.
The statement clearly shows contribution, which managers use for decisions.

Sales − variable cost of sales = contribution.
Contribution − fixed costs = profit.
Inventory valued at variable production cost only.
All fixed costs written off in full as a period cost.

See the full worked example for marginal costing and profit statements →

The absorption-costing profit statement

Full cost of sales gives gross profit, with an under/over-absorption adjustment.

Under absorption costing, units carry a share of fixed production overhead, so:

Absorption-costing statement	$
Sales revenue	X
less Cost of sales (at full production cost)*	(X)
= Gross profit	X
± Under/over-absorption of overhead	X/(X)
less Non-production (selling, admin) costs	(X)
= Profit	X

*Full cost of sales = opening inventory (at full cost) + full production cost − closing inventory (at full cost).

Key points:

Inventory is valued at full production cost (variable + absorbed fixed overhead).
A separate under/over-absorption adjustment is needed because overhead is absorbed at a predetermined rate (under-absorption reduces profit; over-absorption increases it).
This is the layout required for the financial statements.

Sales − full cost of sales = gross profit.
Adjust for under-absorption (charge) or over-absorption (credit).
Then deduct non-production costs to get profit.
Inventory valued at full production cost (incl. fixed overhead).

See the full worked example for marginal costing and profit statements →

Why the two profits differ

The difference is the fixed overhead held back in (or released from) inventory.

The two methods give different profit whenever inventory changes, because they treat fixed production overhead differently:

Under absorption costing, fixed overhead is carried in inventory and only charged when the units are sold.
Under marginal costing, fixed overhead is all written off now, regardless of how many units are sold.

So:

Inventory level	Effect
Increases (produce > sell)	Absorption profit higher (fixed cost carried forward in closing inventory)
Decreases (sell > produce)	Absorption profit lower (fixed cost in opening inventory released)
No change	Profits are equal

Size of the difference:

$\text{Profit difference} = \text{Fixed overhead per unit} \times \text{Change in inventory (units)}$

This is the bridge used in the reconciliation between the two statements (the next subtopic).

Profits differ only when inventory changes.
Inventory rises → absorption profit higher; falls → lower; unchanged → equal.
Difference = fixed overhead per unit × change in inventory units.
Absorption carries fixed cost in inventory; marginal writes it off now.

Which statement to use

Marginal for internal decisions; absorption for the published accounts.

Both statements are correct — they just serve different purposes:

Marginal costing is best for internal decision-making: it highlights contribution and avoids carrying fixed overhead in inventory, so it cannot be 'flattered' by over-production.
Absorption costing is required for the financial statements (IAS 2 inventory at full production cost) and suits long-run, full-cost pricing.

Over the whole life of the business the total profit is the same under both methods — they differ only in which period profit is reported, because of the timing of when fixed overhead hits the income statement. A good answer can prepare either statement and explain the difference confidently.

Marginal costing: internal decisions, highlights contribution.
Absorption costing: required for the accounts, long-run pricing.
Total profit over the business's life is the same under both.
They differ only in the timing of when fixed overhead is charged.

Quick recap

Marginal statement: sales − variable cost of sales = contribution − fixed costs = profit.
Absorption statement: sales − full cost of sales = gross profit ± under/over-absorption − non-production costs = profit.
Marginal inventory = variable cost; absorption inventory = full production cost.
Inventory rises → absorption profit higher; falls → lower; unchanged → equal.
Profit difference = fixed overhead per unit × change in inventory units.
Marginal for decisions; absorption for the financial statements.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Marginal: Sales − variable cost of sales = Contribution − Fixed costs = Profit.
Absorption: Sales − full cost of sales = Gross profit ± under/over-absorption − non-production costs = Profit.
Inventory: marginal = variable cost; absorption = full production cost.
Profit difference = fixed overhead per unit × change in inventory (units).

How it’s examined

Tested on Paper 4: prepare a profit statement using marginal and/or absorption costing from given data, and explain the difference in profit (commonly [8-14] marks). Examiner reports note candidates valuing inventory inconsistently with the method, forgetting the under/over-absorption line, and mislabelling contribution.

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 2026-06-18.

Take this whole topic with you

Step-by-step worked examples — Marginal Costing and Profit Statements

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

Question type:

1Value inventory under each method (4 marks)
Getting startedMulti-step problem• 9706 Paper 4 style• inventory valuation, AO2
Question
A unit's variable production cost is $12; fixed production overhead is absorbed at$ 4 per unit. Closing inventory is 500 units. Calculate the closing-inventory value under (a) marginal and (b) absorption costing. (4 marks)
Step-by-step solution
1. Step 1
  (a) Marginal: value at variable cost only = 12 × 500 = $6,000.
2. Step 2
  (b) Absorption: value at full cost = (12 + 4) × 500 = 16 × 500 = $8,000.
3. Step 3
  Difference = $2,000 = fixed overhead carried in inventory (4 × 500).
Answer
(a) $6,000; (b)$ 8,000 (difference $2,000 of fixed overhead).
Examiner tip
Marginal inventory excludes fixed overhead; absorption includes it.
2Build the contribution line (4 marks)
Getting startedMulti-step problem• contribution, AO2
Question
Sales $200,000; variable cost of sales$ 120,000; variable selling costs $10,000. Calculate the contribution. (4 marks)
Step-by-step solution
1. Step 1
  Total variable costs = variable cost of sales + variable selling = 120,000 + 10,000 = $130,000.
2. Step 2
  Contribution = sales − total variable costs = 200,000 − 130,000.
3. Step 3
  = $70,000.
Answer
Contribution = $70,000.
Examiner tip
Deduct ALL variable costs (production AND selling) before fixed costs.
3Marginal-costing profit statement (6 marks)
Building confidenceMulti-step problem• marginal costing, profit statement, AO2
Question
Sales 9,000 units at $30. Variable production cost$ 14/unit; production 10,000 units; no opening inventory; closing inventory 1,000 units. Fixed costs $90,000. Prepare a marginal-costing profit statement. (6 marks)
Step-by-step solution
1. Step 1
  Sales = 9,000 × 30 = $270,000.
2. Step 2
  Variable production cost = 10,000 × 14 = $140,000; closing inventory = 1,000 × 14 = $14,000.
3. Step 3
  Variable cost of sales = 140,000 − 14,000 = $126,000.
4. Step 4
  Contribution = 270,000 − 126,000 = $144,000.
5. Step 5
  Profit = contribution − fixed costs = 144,000 − 90,000 = $54,000.
Answer
Contribution $144,000; profit$ 54,000.
Examiner tip
Closing inventory is valued at variable cost ($14), and all fixed costs are deducted in full.
4Absorption-costing profit statement (7 marks)
StretchMulti-step problem• absorption costing, profit statement, AO2
Question
Same data: sales 9,000 units at $30; variable production$ 14/unit; fixed production overhead absorbed at $9/unit (budget 10,000 units); production 10,000 units; closing inventory 1,000 units; actual fixed overhead$ 90,000. Prepare an absorption-costing profit statement. (7 marks)
Step-by-step solution
1. Step 1
  Full production cost per unit = 14 + 9 = $23.
2. Step 2
  Sales = $270,000. Cost of sales = 9,000 × 23 = $207,000 (closing inventory 1,000 × 23 = $23,000).
3. Step 3
  Gross profit = 270,000 − 207,000 = $63,000.
4. Step 4
  Overhead absorbed = 10,000 × 9 = 90,000 = actual 90,000 → no under/over-absorption.
5. Step 5
  Profit = gross profit − non-production costs (none here) = $63,000.
Answer
Gross profit and profit = $63,000.
Examiner tip
Inventory at full cost ( $23). Absorption profit ($ 63,000) exceeds marginal ( $54,000) by$ 9,000 — the fixed overhead in the 1,000-unit inventory rise.
5Statement with under-absorption (6 marks)
StretchMulti-step problem• under/over-absorption, AO2
Question
Gross profit is $80,000. Overhead was absorbed at$ 5/unit on 11,000 actual units, but actual fixed overhead was $60,000. Non-production costs are$ 15,000. Complete the profit to the bottom line. (6 marks)
Step-by-step solution
1. Step 1
  Overhead absorbed = 5 × 11,000 = $55,000.
2. Step 2
  Under/over = absorbed − actual = 55,000 − 60,000 = −$5,000 → under-absorbed $5,000 (a charge).
3. Step 3
  Adjusted gross profit = 80,000 − 5,000 = $75,000.
4. Step 4
  Profit = 75,000 − non-production 15,000 = $60,000.
Answer
Under-absorbed $5,000; profit$ 60,000.
Examiner tip
Don't forget the under/over-absorption line — under-absorption reduces profit.
6Profit difference from inventory change (5 marks)
StretchMulti-step problem• profit difference, AO2
Question
Fixed overhead is absorbed at $6 per unit. Opening inventory was 800 units and closing inventory is 2,000 units. Calculate the difference between absorption and marginal profit, and state which is higher. (5 marks)
Step-by-step solution
1. Step 1
  Change in inventory = closing − opening = 2,000 − 800 = +1,200 units (inventory rose).
2. Step 2
  Profit difference = fixed overhead per unit × change = 6 × 1,200 = $7,200.
3. Step 3
  Inventory rose, so absorption profit is higher by $7,200.
Answer
$7,200; absorption profit is higher (inventory rose).
Examiner tip
Difference = fixed OAR × change in inventory units; inventory up → absorption higher.
7When inventory falls (5 marks)
StretchMulti-step problem• profit difference, AO2
Question
Fixed overhead is $8 per unit. Opening inventory 3,000 units; closing inventory 1,000 units. State which method gives the higher profit and by how much. (5 marks)
Step-by-step solution
1. Step 1
  Change in inventory = 1,000 − 3,000 = −2,000 units (inventory fell).
2. Step 2
  Profit difference = 8 × 2,000 = $16,000.
3. Step 3
  Inventory fell, so marginal profit is higher by $16,000 (absorption releases the fixed cost in opening inventory).
Answer
Marginal profit is higher by $16,000 (inventory fell).
Examiner tip
Inventory falls → absorption profit lower (opening fixed cost released into cost of sales).
8Explain the difference (4 marks)
StretchWord problem• profit difference, AO3
Question
Explain why absorption costing reports a higher profit than marginal costing when production exceeds sales. (4 marks)
Step-by-step solution
1. Step 1
  Production > sales means inventory increases.
2. Step 2
  Under absorption costing, each unit of closing inventory carries fixed overhead forward.
3. Step 3
  So that fixed overhead is not charged this period — it stays in closing inventory.
4. Step 4
  Under marginal costing all fixed overhead is charged now, so its profit is lower — hence absorption profit is higher.
Answer
Rising inventory carries fixed overhead forward under absorption costing, raising its profit above marginal.
Examiner tip
The carried-forward fixed overhead in closing inventory is the source of the higher absorption profit.
9Both statements agree when no inventory change (5 marks)
StretchMulti-step problem• profit statement, AO2
Question
Production equals sales (no opening or closing inventory). Explain, and show with the difference formula, why marginal and absorption profit are equal. (5 marks)
Step-by-step solution
1. Step 1
  With no inventory change, closing − opening inventory = 0 units.
2. Step 2
  Profit difference = fixed overhead per unit × 0 = $0.
3. Step 3
  All fixed overhead produced is also sold, so absorption and marginal charge the same fixed cost this period.
4. Step 4
  Therefore the two profits are equal.
Answer
No inventory change → zero difference → the two profits are equal.
Examiner tip
Profit only differs when inventory changes; otherwise the methods agree.
10Which statement for which purpose (4 marks)
StretchWord problem• evaluation, AO3
Question
State which profit statement should be used for (a) the published financial statements and (b) an internal decision on a special order, with a reason for each. (4 marks)
Step-by-step solution
1. Step 1
  (a) Published accounts → absorption costing: IAS 2 requires inventory at full production cost.
2. Step 2
  (b) Special order → marginal costing: it highlights contribution, the right basis when fixed costs don't change.
3. Step 3
  Both are correct for their purpose; they differ only in the timing of fixed-overhead recognition.
Answer
(a) Absorption (IAS 2); (b) marginal (contribution for the decision).
Examiner tip
Match the statement to the purpose — accounts vs internal decision.

Model Answers — Marginal Costing and Profit Statements

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

Question 1
9706 Paper 4 style4 marks
Q (4 marks). A unit costs $18 variable to produce and absorbs$ 6 of fixed production overhead. Closing inventory is 700 units. Calculate the closing-inventory value under marginal and under absorption costing.
Model answer
Marginal: 18 × 700 = $12,600 (variable cost only). Absorption: (18 + 6) × 700 = 24 × 700 = $16,800 (full production cost).
Why this scores
Marking (point-based, 4). Marginal $12,600 (2); absorption$ 16,800 (2). Difference = $4,200 of fixed overhead.
Question 2
9706 Paper 4 style3 marks
Q (3 marks). Sales are $400,000, variable cost of sales$ 230,000 and variable distribution costs $20,000. Calculate the contribution.
Model answer
Contribution = sales − all variable costs = 400,000 − (230,000 + 20,000) = 400,000 − 250,000 = $150,000.
Why this scores
Marking (point-based, 3). Total variable $250,000 (1); contribution$ 150,000 (2). Include variable distribution.
Question 3
9706 Paper 4 style6 marks
Q (6 marks). Sales 12,000 units at $25. Variable production cost$ 11/unit; production 14,000 units; no opening inventory; closing inventory 2,000 units. Fixed costs $120,000. Prepare a marginal-costing profit statement.
Model answer
Sales = 12,000 × 25 = $300,000. Variable production cost = 14,000 × 11 = 154,000; closing inventory = 2,000 × 11 = 22,000. Variable cost of sales = 154,000 − 22,000 = 132,000. Contribution = 300,000 − 132,000 = $168,000. Profit = contribution − fixed costs = 168,000 − 120,000 = $48,000.
Why this scores
Marking (point-based, 6). Sales (1); variable cost of sales $132,000 (2); contribution$ 168,000 (2); profit $48,000 (1).
Question 4
9706 Paper 4 style7 marks
Q (7 marks). Using the same data (sales 12,000 units at $25; variable production$ 11/unit; production 14,000 units; closing inventory 2,000 units), fixed production overhead is absorbed at $8/unit (budget 15,000 units) and actual fixed overhead is$ 120,000. Prepare an absorption-costing profit statement.
Model answer
Full production cost per unit = 11 + 8 = $19. Sales = $300,000. Cost of sales = 12,000 × 19 = 228,000 (closing inventory 2,000 × 19 = 38,000). Gross profit = 300,000 − 228,000 = $72,000. Overhead absorbed = 14,000 × 8 = 112,000; actual = 120,000 → under-absorbed $8,000 (charge). Profit = 72,000 − 8,000 = $64,000.
Why this scores
Marking (point-based, 7). Full cost $19 (1); cost of sales$ 228,000 (2); gross profit $72,000 (1); under-absorption$ 8,000 (2); profit $64,000 (1).
Question 5
9706 Paper 4 style4 marks
Q (4 marks). In the previous two parts, marginal profit was $48,000 and absorption profit was$ 64,000. Show, using the change in inventory, why the difference is $16,000.
Model answer
Change in inventory = closing − opening = 2,000 − 0 = +2,000 units (inventory rose). Profit difference = fixed overhead per unit × change in inventory = 8 × 2,000 = $16,000. Because inventory rose, absorption costing carried $16,000 of fixed overhead forward in closing inventory, so its profit ($64,000) is $16,000 higher than marginal ($48,000). ✓
Why this scores
Marking (point-based, 4). Change +2,000 units (1); × fixed OAR $8 =$ 16,000 (2); absorption higher because inventory rose (1).
Question 6
9706 Paper 4 style4 marks
Q (4 marks). Fixed overhead is absorbed at $7 per unit. Opening inventory was 1,500 units and closing inventory is 600 units. Calculate the profit difference and state which method gives the higher profit.
Model answer
Change in inventory = 600 − 1,500 = −900 units (inventory fell). Profit difference = 7 × 900 = $6,300. Inventory fell, so marginal costing gives the higher profit by $6,300 (absorption releases the fixed cost held in opening inventory).
Why this scores
Marking (point-based, 4). Change −900 (1); difference $6,300 (2); marginal higher (1).
Question 7
9706 Paper 4 style6 marks
Q (6 marks). Explain why marginal costing and absorption costing produce different profit figures, and state when each method produces the higher profit.
Model answer
The methods treat fixed production overhead differently. Under absorption costing it is included in the cost of units and therefore carried in inventory, only being charged when the units are sold. Under marginal costing it is a period cost, written off in full each period.

So the profits differ only when inventory changes:

When inventory rises (production > sales), absorption costing carries fixed overhead forward in closing inventory, charging less now, so absorption profit is higher.

When inventory falls (sales > production), the fixed overhead in opening inventory is released into cost of sales, so absorption profit is lower (marginal higher).

When inventory is unchanged, the two profits are equal.

The difference equals the fixed overhead per unit × the change in inventory. Over the whole life of the business the total profit is the same under both — only the timing differs.
Why this scores
Marking (point-based, 6). Fixed overhead in inventory vs period cost (~2); rise → absorption higher / fall → lower / equal (~3); timing-not-total / size of difference (~1).
Question 8
9706 Paper 4 style4 marks
Q (4 marks). State which costing method should be used to prepare (a) the published financial statements and (b) a statement to support an internal pricing decision, giving a reason for each.
Model answer
(a) Published financial statements → absorption costing, because IAS 2 requires inventory at full production cost (including a share of production overhead). (b) Internal short-term decision → marginal costing, because it highlights contribution and excludes unavoidable fixed overhead, giving the relevant figures for the decision.
Why this scores
Marking (point-based, 4). (a) absorption / IAS 2 (2); (b) marginal / contribution (2).
Question 9
9706 Paper 4 style5 marks
Q (5 marks). Gross profit (absorption) is $95,000. Fixed overhead was absorbed at$ 4 per unit on 16,000 actual units; actual fixed overhead was $70,000. Non-production costs are$ 18,000. Calculate the under/over-absorption and the final profit.
Model answer
Overhead absorbed = 4 × 16,000 = $64,000. Under/over = 64,000 − 70,000 = −$6,000 (under-absorbed, a charge). Adjusted gross profit = 95,000 − 6,000 = $89,000. Profit = 89,000 − 18,000 = $71,000.
Why this scores
Marking (point-based, 5). Absorbed $64,000 (1); under-absorbed$ 6,000 (2); profit $71,000 (2).
Question 10
9706 Paper 4 style3 marks
Q (3 marks). Explain why marginal costing and absorption costing give the same profit when production equals sales.
Model answer
When production equals sales there is no change in inventory, so no fixed overhead is carried forward or released. Both methods therefore charge the same fixed overhead in the period, and the profit is identical. (Profit difference = fixed overhead per unit × 0 = $0.)
Why this scores
Marking (point-based, 3). No inventory change (1); no fixed overhead carried/released (1); profits equal (1).

Key Definitions and Keywords — Marginal Costing and Profit Statements

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

Marginal-costing profit statement
Examiner keyword
Sales − variable cost of sales = contribution; − fixed costs = profit. Inventory at variable cost.
Absorption-costing profit statement
Examiner keyword
Sales − full cost of sales = gross profit; ± under/over-absorption; − non-production costs = profit. Inventory at full cost.
Contribution
Examiner keyword
Sales − variable costs; the sub-total shown in a marginal-costing statement.
Cost of sales
Examiner keyword
Opening inventory + production cost − closing inventory; valued at variable cost (marginal) or full cost (absorption).
Under/over-absorption adjustment
Examiner keyword
The adjustment in an absorption statement for the difference between absorbed and actual overhead.
Fixed overhead per unit (fixed OAR)
Examiner keyword
Budgeted fixed production overhead ÷ budgeted units; used to value inventory and to bridge the two profits.
Profit difference
Examiner keyword
Fixed overhead per unit × change in inventory units — the gap between absorption and marginal profit.

Common Mistakes and Misconceptions — Marginal Costing and Profit Statements

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

✕Valuing inventory inconsistently with the method
9706 Examiner Reports
Why it happens
Mixing the two layouts.
How to avoid it
Marginal inventory = VARIABLE cost; absorption inventory = FULL production cost. Be consistent throughout.
✕Forgetting the under/over-absorption line in the absorption statement
9706 Examiner Reports
Why it happens
Stopping at gross profit.
How to avoid it
After gross profit, adjust for under-absorption (charge) or over-absorption (credit) before non-production costs.
✕Deducting fixed costs before contribution
9706 Examiner Reports
Why it happens
Treating fixed costs as part of cost of sales in a marginal statement.
How to avoid it
In a marginal statement, deduct ONLY variable costs to reach contribution; fixed costs come after.
✕Getting the profit-difference direction wrong
9706 Examiner Reports
Why it happens
Forgetting which method carries fixed cost in inventory.
How to avoid it
Inventory RISES → absorption HIGHER; inventory FALLS → absorption LOWER; unchanged → equal.
✕Using actual fixed cost per unit for the bridge
9706 Examiner Reports
Why it happens
Dividing actual fixed cost by units produced.
How to avoid it
Use the PREDETERMINED fixed OAR (budgeted fixed overhead ÷ budgeted units) × change in inventory.
✕Including selling costs in inventory valuation
9706 Examiner Reports
Why it happens
Treating all costs as product costs.
How to avoid it
Only PRODUCTION costs are carried in inventory; selling/admin costs are period costs in both methods.

Marginal Costing and Profit Statements

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Value inventory under each method (4 marks)

2Build the contribution line (4 marks)

3Marginal-costing profit statement (6 marks)

4Absorption-costing profit statement (7 marks)

5Statement with under-absorption (6 marks)

6Profit difference from inventory change (5 marks)

7When inventory falls (5 marks)

8Explain the difference (4 marks)

9Both statements agree when no inventory change (5 marks)

10Which statement for which purpose (4 marks)

Marginal-costing profit statement

Absorption-costing profit statement

Contribution

Cost of sales

Under/over-absorption adjustment

Fixed overhead per unit (fixed OAR)

Profit difference

✕Valuing inventory inconsistently with the method

✕Forgetting the under/over-absorption line in the absorption statement

✕Deducting fixed costs before contribution

✕Getting the profit-difference direction wrong

✕Using actual fixed cost per unit for the bridge

✕Including selling costs in inventory valuation