ZIMSEC A Level · Accounting · Form 6
Marginal costing
Only variable costs are charged to units; fixed costs are period costs.
- Contribution = selling price − variable cost per unit.
- Break-even point (units) = fixed costs ÷ contribution per unit.
- Margin of safety = actual (or budgeted) sales − break-even sales.
- Target profit units = (fixed costs + target profit) ÷ contribution per unit.
Worked example: Selling price US$20; variable cost US$12; fixed costs US$40 000; budgeted sales 7 000 units. Find break-even, margin of safety and profit.
Contribution = 8 per unit; break-even = 40 000 ÷ 8 = 5 000 units
Margin of safety = 7 000 − 5 000 = 2 000 units
Profit = 7 000 × 8 − 40 000 = US$16 000
Decision-making
Use contribution for special orders (accept if contribution is positive and capacity is spare), make-or-buy, and ranking products by contribution per unit of a limiting factor.
Absorption costing
All production costs, including fixed overheads, are charged to units using an overhead absorption rate (OAR) = budgeted overheads ÷ budgeted activity (e.g. machine hours). Under- or over-absorption arises when actual figures differ from budget.
Comparing profits
When inventory increases, absorption costing reports higher profit than marginal costing (fixed costs are carried forward in inventory). Difference = change in inventory units × fixed overhead per unit.
Check yourself
- Price US$15, variable cost US$9, fixed costs US$24 000. Find the break-even units.
- Should a business accept a special order at a price above variable cost if it has spare capacity?
- Budgeted overheads US$60 000; budgeted machine hours 12 000. Find the OAR.
Show answers
- 24 000 ÷ 6 = 4 000 units
- Yes, in financial terms, as it adds contribution (check non-financial effects on regular customers).
- US$5 per machine hour
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