Hi,
The difference between 'direct sub elements' and 'all sub elements' is presicely to display either only the products directly in the main category of the page (so A), or the products of the main category and all its sub categories (Az, Ab, Aa1, etc).
This is working fine for me and has worked fine for years.
So I'm suspecting there is something else you're missing.
I would need the URL of the page and screenshot of the settings under the "products options" and "categories options" tabs of the corresponding menu item to better understand the situation.