Calculate total product cost and selling price under ABC
Add direct costs and allocated activity overhead, calculate unit cost, then apply the stated pricing rule.
Section 4.1 · Activity based costing
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.1 covers activity-based costing (ABC), cost drivers, overhead apportionment and allocation, unit cost and selling-price calculations, method comparisons, uses and limitations, and supported decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use AS Topic 2.1–2.2 knowledge of fixed and variable costs, overhead absorption, cost-plus pricing and contribution. This A Level pathway compares those methods with activity-based costing.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Unit cost is $80 and the question asks for a 25% mark-up on cost. What is the price?
What you will learn
- Calculate total product cost from direct cost and ABC overhead
- Calculate cost per unit
- Calculate a selling price using the rule supplied
Build cost in a clear sequence
Product total cost = direct costs + ABC overhead allocated to that product. Unit cost = product total cost ÷ units produced. If there are several activity pools, add each allocation before dividing by units.
To calculate a selling price, use the pricing instruction given. For example, a 25% mark-up on cost gives price = unit cost × 1.25. A target profit or margin on sales uses a different calculation; read the base carefully and do not call cost price a selling price.
Explain what the calculated price does not decide
ABC can provide a fuller estimate of product overhead use, but a cost-plus price is not automatically the price customers will pay. Demand, competition, quality, capacity and strategic objectives can affect the final decision.
Fixed overhead allocation is useful for product costing but may not be the incremental cash cost of accepting one extra order. For short-run decisions, identify avoidable costs and spare capacity where the question supplies that information.
Pause and explain
Does a cost-plus price guarantee that customers will buy the product?
Worked example
Product A has direct cost $95 per unit, receives $104,000 of ABC overhead for 1,000 units and uses a 25% mark-up on cost. Calculate unit cost and selling price.
Show the worked solution
- ABC overhead per unit = $104,000 ÷ 1,000 = $104.
- Unit cost = $95 + $104 = $199.
- Selling price = $199 × 1.25 = $248.75 per unit.
Answer Unit cost is $199 and cost-plus selling price is $248.75 per unit.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Product B has direct cost $210 per unit and receives $204,000 ABC overhead for 600 units. Calculate its unit cost and price with a 25% mark-up.
Give me a hint
Find overhead per unit before adding direct cost.
Compare my reasoning
- Overhead per unit = $204,000 ÷ 600 = $340.
- Unit cost = $210 + $340 = $550.
- Price = $550 × 1.25 = $687.50 per unit.
Unit cost is $550 and the stated cost-plus price is $687.50 per unit.
Look for these in your work
- Calculate overhead per unit as $340.
- Add $210 direct cost to get $550.
- Apply the 25% mark-up to get $687.50.
A product has $72,000 direct costs and $48,000 ABC overhead for 2,000 units. Calculate unit cost and a selling price with 20% mark-up on cost.
Give me a hint
Total the costs before dividing; apply mark-up to the unit cost.
Compare my reasoning
- Total product cost = $72,000 + $48,000 = $120,000.
- Unit cost = $120,000 ÷ 2,000 = $60.
- Price = $60 × 1.20 = $72 per unit.
Unit cost is $60 and the cost-plus selling price is $72.
Look for these in your work
- Add direct cost and ABC overhead.
- Divide by 2,000 units.
- Apply the 20% mark-up to unit cost.
A cost-plus price of $248.75 is above a competitor's $230 price. What should the sales director examine before rejecting the product or changing the price?
Give me a hint
Use ABC as evidence, but compare market value, product mix and the assumptions behind the cost.
Compare my reasoning
- Check whether the driver allocations reflect real activity use and whether any pool is fixed or avoidable.
- Review competitor specification, quality, customer willingness to pay, demand and the product's contribution at relevant volumes.
- Consider process improvements, design changes or a different pricing strategy and assess the effect on profit and non-financial objectives.
Validate the cost and market evidence, then consider operational changes or pricing options; a cost-plus figure alone does not decide whether to sell.
Look for these in your work
- Check the ABC drivers and cost assumptions.
- Assess customer value and competitor differences.
- Compare alternatives and their profit effects.
Common mistakes
- Adding overhead per product to direct cost per unit without converting units consistently
- Applying a percentage margin when the question says mark-up
- Assuming the calculated cost-plus price is the market price
What can you explain now?
How is unit cost calculated after all product overhead is allocated?
Compare with the explanation
Total product cost ÷ units produced
Divide the product's total direct and allocated costs by output.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
State the sequence from ABC overhead allocation to a cost-plus selling price per unit.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.