In marginal costing, costs are split by behavior: variable costs change with the level of output, while fixed costs stay the same regardless of how much is produced. Because fixed costs do not vary with production, they are not attached to individual units. Instead, they are treated as period costs and charged to the income statement for the period in which they are incurred. This is why all fixed costs are period costs in marginal costing. Product costs, by contrast, include only variable manufacturing costs; fixed manufacturing overhead is not included in the per-unit cost under this method.

Profit is what’s left after all costs are covered, and it helps to split costs into variable (changing with output) and fixed (unchanging). The amount you get when you subtract variable costs from revenue is the contribution—the money available to cover fixed costs and, after those are covered, to become profit. So profit can be written as revenue minus variable costs, and that same amount equals contribution minus fixed costs. This makes the option that shows both expressions the clearest and most complete statement of how profit relates to revenue, variable costs, fixed costs, and contribution. The other options miss parts of the picture: subtracting fixed costs from revenue ignores variable costs, and subtracting variable costs from revenue gives contribution, not final profit, until fixed costs are accounted for.

The two main ways inventory is reviewed and orders are placed are fixed quantity (order a constant amount each time) and periodic review (place orders at fixed time intervals). In the fixed quantity system, you trigger an order when stock falls to a reorder point, ordering a fixed quantity each time to bring stock back up. In the periodic review system, you review and order at regular intervals, with the order size sized to cover expected demand during the interval plus any safety stock. These two capture the common approaches to controlling stock levels: how often you review and how much you reorder. Other options mix in approaches that aren’t considered the standard two categories here—continuous or perpetual review is often viewed as the same idea as fixed quantity in practice, JIT is more about a broader production/flow philosophy, and a generic stock-control system isn’t a specific inventory-control framework.

Once overheads have been grouped into cost pools and their drivers identified, the next step is to translate those budgets into a usable price for each driver. This means calculating the cost driver rates by dividing the budgeted overhead for each pool by the budgeted level of its driver. These rates become the amounts used to apply or absorb overheads to products or services based on actual consumption of each driver. For example, if a pool has budgeted overhead of £120,000 and the driver is 24,000 machine hours, the rate is £5 per machine hour. When actual hours are known, you multiply by the rate to allocate overhead accordingly. Absorbing overheads based on demand is something you do after the rates exist; production quantity is not what creates the rate in ABC, and using a single overhead rate contradicts the multiple-rate approach of activity-based costing.

Periodic review means you check and place replenishment orders at fixed, regular intervals. At each review, you assess current stock and order enough to bring the inventory up to a predetermined target level, regardless of how much stock you have at that moment. This differs from continuous review, where an order is triggered as soon as stock falls to a reorder point. So the timing of orders is set by the schedule, not by the stock level.