Skip to content

Performance Management · Pricing decisions

Full Cost-Plus and Marginal Cost-Plus Pricing Explained

Updated 11 October 2026 · Fact-checked

Cost-plus pricing sets a selling price by taking a unit cost and adding a mark-up. Full cost-plus uses total absorption cost per unit. Marginal cost-plus uses variable cost per unit. Work out the cost, apply the mark-up percentage to it, and add the two to get the price.

Understand Cost-Plus Pricing Methods

Cost-plus pricing starts from what the product costs you. You find a cost per unit, then add a mark-up to cover profit (and, in marginal cost-plus, fixed costs too). The result is the selling price.

There are two versions. Full cost-plus uses the full absorption cost per unit: direct materials, direct labour, variable overheads and a share of fixed production overheads. The mark-up then gives the profit. Some questions also include non-production overheads in the full cost. Read the question to see which is meant.

Marginal cost-plus uses only the variable cost per unit. The mark-up must cover fixed costs and profit, so it is usually larger than a full cost mark-up.

A mark-up is a percentage of cost. A margin is a percentage of selling price. Mark-up of 25% on cost gives price = cost × 1.25. This equals a margin of 20% on price (0.25 ÷ 1.25). Examiners test this difference.

Cost-plus is popular because it is simple and quick. Its weakness is that it starts from cost, not from the market. It ignores demand and competitors. Under full cost-plus, the unit cost depends on the expected output level used to absorb fixed overheads, so the price can become circular: a lower volume raises unit cost, which raises price, which may lower volume further.

Key rules to remember

Full cost
Full cost per unit = variable cost per unit + fixed overhead absorbed per unit
Fixed overhead per unit = budgeted fixed overhead ÷ budgeted activity level.
Price with mark-up on cost
Selling price = cost × (1 + mark-up %)
Use full cost for full cost-plus and variable cost for marginal cost-plus.
Mark-up on cost
Mark-up % = (selling price − cost) ÷ cost × 100
Use this to find the mark-up a current price implies.
Margin on selling price
Margin % = (selling price − cost) ÷ selling price × 100
Margin % = mark-up % ÷ (1 + mark-up %).
Required mark-up for a target return
Mark-up % = required profit ÷ total cost base × 100
Used when a target profit is set and the cost base is known.

How to solve Cost-Plus Pricing Methods questions

Use this order for any cost-plus question. It keeps the cost base and the mark-up basis clear.

  1. 1Read which method is asked for: full cost-plus or marginal cost-plus.
  2. 2List the cost elements per unit: direct materials, direct labour, variable overhead.
  3. 3For full cost, calculate fixed overhead per unit using the budgeted activity level and add it.
  4. 4Check whether the mark-up is on cost or on selling price. Convert if needed.
  5. 5Apply the mark-up to the correct cost base and add it to get the price.
  6. 6Check the result: compute total profit or contribution at the given volume and see if it makes sense.
  7. 7If asked, comment on advantages, disadvantages or whether the price suits the market.

Quickest way: Cost × (1 + mark-up) in one pass

When to use it: Use it for Section A and OT case questions where you only need the price or the mark-up.

  1. Write the cost per unit on your working sheet, noting full or variable.
  2. Multiply by 1 + mark-up, for example × 1.30 for 30%.
  3. If the mark-up is on selling price, divide cost by (1 − margin), for example ÷ 0.75 for a 25% margin.
  4. Scan the options. Remove any that used the wrong cost base, then pick the match.

Common mistakes in Cost-Plus Pricing Methods

  • Mixing up mark-up on cost with margin on selling price.

    Both are percentages of profit, and the wording is similar.

    Fix: Check the base. Mark-up uses cost: cost × (1 + m). Margin uses price: cost ÷ (1 − m).

  • Using the wrong activity level to absorb fixed overhead.

    Students use actual or sales volume instead of the budgeted level in the question.

    Fix: Use the activity level given for absorption, usually budgeted production, unless told otherwise.

  • Adding fixed costs on top of a marginal cost-plus price.

    Students treat the marginal mark-up like a profit-only mark-up.

    Fix: Remember the marginal mark-up must cover fixed costs and profit. Do not add fixed cost separately.

  • Comparing mark-up percentages between the two methods as if they were the same.

    A 30% mark-up looks the same on any base.

    Fix: The same price can come from a small mark-up on full cost or a large mark-up on variable cost. Compare the prices, not the percentages.

  • Giving generic advantages and disadvantages.

    Students memorise a list and do not link it to the scenario.

    Fix: Pick points that fit the case: for example, ignoring demand, or the circular link between volume and unit cost, and tie each to the facts given.

Worked examples

Example 1

Zeta Ltd makes one product. Per unit: direct materials ₹120, direct labour ₹80, variable overhead ₹40. Budgeted fixed production overheads are ₹6,00,000 and budgeted output is 5,000 units. Zeta uses full cost-plus with a mark-up of 25%. Calculate the selling price per unit.

Show the solution
  1. Variable cost per unit = 120 + 80 + 40 = ₹240.
  2. Fixed overhead per unit = ₹6,00,000 ÷ 5,000 = ₹120.
  3. Full cost per unit = 240 + 120 = ₹360.
  4. Mark-up = 25% × 360 = ₹90.
  5. Selling price = 360 + 90 = ₹450.

Answer: The selling price is ₹450 per unit.

Example 2

Using Zeta Ltd's data, the company instead uses marginal cost-plus and wants the same total profit as under full cost-plus if 5,000 units are sold. Calculate the mark-up percentage on variable cost required, and the price.

Show the solution
  1. Total revenue at ₹450 × 5,000 = ₹22,50,000.
  2. Total variable cost = 240 × 5,000 = ₹12,00,000.
  3. Total contribution needed = 22,50,000 − 12,00,000 = ₹10,50,000.
  4. Check: fixed costs ₹6,00,000 plus profit 90 × 5,000 = ₹4,50,000 gives ₹10,50,000. This agrees.
  5. Mark-up per unit = 10,50,000 ÷ 5,000 = ₹210.
  6. Mark-up % on variable cost = 210 ÷ 240 = 87.5%.
  7. Price = 240 × 1.875 = ₹450.

Answer: The mark-up on variable cost is 87.5%, giving a price of ₹450 per unit. The price is the same as under full cost-plus, but the mark-up percentage is much higher because it must cover fixed costs.

Exam tips

  • Underline whether the mark-up is on cost or on selling price before you calculate anything.
  • In OT questions, wrong options often come from using the wrong cost base. Work out both costs and see which is asked for.
  • In Section C, show the unit cost build-up in a clear list so you earn method marks even if a figure is wrong.
  • For discussion parts, give a point, then link it to the scenario. Cover both advantages (simple, quick, covers costs) and disadvantages (ignores demand, depends on volume forecast, arbitrary overhead absorption).
  • Be ready to compare cost-plus with market-based approaches such as skimming or penetration pricing.

Practice questions from Pricing decisions

Cost-Plus Pricing Methods in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cost-Plus Pricing Methods: frequently asked questions

What is the difference between full cost-plus and marginal cost-plus?

Full cost-plus adds a mark-up to the full absorption cost per unit, which includes a share of fixed overheads. Marginal cost-plus adds a mark-up to variable cost only. The marginal mark-up must therefore be bigger, because it covers fixed costs as well as profit.

How do I calculate mark-up on full cost in ACCA PM?

Find the full cost per unit, then multiply by the mark-up percentage to get the profit per unit. Add this to the full cost to get the price. To find the mark-up from a known price, use (price − cost) ÷ cost.

What are the advantages and disadvantages of cost-plus pricing?

It is simple, quick and ensures costs are covered if the volume forecast holds. It ignores demand, competitors and price elasticity. Full cost-plus also depends on the activity level used to absorb fixed overheads, and the arbitrary apportionment of overheads can distort cost.

Is mark-up the same as margin?

No. Mark-up is profit as a percentage of cost. Margin is profit as a percentage of selling price. A 25% mark-up equals a 20% margin.