Approaches to costing: full, contribution — common mistakes

In questions asking for a recommendation (e.g., 'Advise the business whether to accept the order'), always justify your choice of costing method first. For example: "Using contribution costing is appropriate here because this is a short-run special order decision and the business has spare capacity." Then, show your calculations clearly to support your final recommendation.

Break-even analysis focuses on determining the sales volume needed to cover all fixed costs. Contribution per unit represents the exact amount each sale contributes towards covering these fixed costs. Using full cost would be inappropriate as it includes an allocated portion of fixed costs, which would distort the calculation.

Yes, significantly. Under absorption costing, closing inventory is valued at its full production cost, including a share of fixed overheads. Under marginal costing, it's valued only at its variable production cost. This difference affects the cost of goods sold and, consequently, the reported profit for a period, especially when inventory levels change.