Contribution is:
- The difference between selling price and variable costs.
- Can also be called “contribution towards fixed costs and profits”
- This is because contribution is available to pay the fixed costs of a business and once the fixed costs are covered the contribution becomes the profit of the entity
- Often seen in profit statement under marginal costing method.
Contributing accounting:
- focuses on identifying fixed and variable costs and calculates the total contribution generated by a business. The total fixed costs are then deducted to give the net profit.
See below for the difference between Contribution and Net profit
Income Statement of Company XYZ
|
$ |
$ |
| Sales |
|
100,000 |
| Less:
Variable costs-direct wages |
20,000 |
|
| Variable costs-direct materials |
10,000 |
30,000 |
| Contribution |
|
70,000 |
| Less: |
|
|
| Fixed costs-factory overheads |
50,000 |
|
| Fixed costs-administrative overheads |
10,000 |
60,000 |
| Net Profit |
|
10,000 |
Contribution costing:-
- Values a product using only the variable costs incurred in its production
Contribution pricing:
- Sets the selling price of a product at a value below total unit cost but one that will cover variable costs.
- Used in short-term decision-making so that the pricing is able to give a positive contribution that is able to cover variable cost to contribute towards fixed costs and profits
Contribution Graph:
- An alternative presentation of a break-even chart. Sales revenue is graphed from the origin as in a traditional break-even chart. Variable costs are also graphed from the origin and then fixed costs are built onto the variable costs.
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