Contribution and Marginal Costing Essay

This is an important lineage concept and must never be confused with profit. The contribution of a crossing refers to how much it contributes to the fixed terms and profit of the business once variable be have been covered. It heap be calculated either per unit of output or in terms of total contribution of all units produced. Contribution ignores fixed be and tho considers any surplus left once variable cost have been subtracted from tax revenue. Hence, contribution is what a harvest contributes towards the fixed costs of the business and, once these are paid, the profits of the business. Managers postulate to know, as accurately as possible, the cost of each result or service produced by the firm. angiotensin-converting enzyme reason for this is the need to make a pricing decision.In fact, buyers of numerous products will want an estimated price or a quotation onwards they agree to purchase. Managers may also need to decide whether production should be stopped, steppe d up or switched to new methods or new materials. Managers also need to compare actual product costs with original budgets and to compare the flowing period with past time periods. In calculating the cost of a product, both turn to labor and luff materials are often lax to identify and allocate to each product. For instance, the materials used in making product X are allocated directly to the cost of that product. These are not the only costs involved.Overheads, or indirect costs, privynot be allocated directly to each product but must be shared between all of the items produced by a business. There is more than one be method that can be used to apportion these costs and, therefore, there may be more than one answer to the question How much does a product cost to produce? contribution costing method that only allocates direct costs to cost/profit centers not overhead costs. This approach to costing solves the problem of how to apportion or divide overhead costs between product s it does not apportion them at all. Instead, the method concentrates on two truly important accounting conceptsMarginal cost is the cost of producing an tautologic unit. This extra cost will clearly be a variable direct cost. For example, if the total cost of producing 100 units is $400 000 and the total cost of producing ci units is $400 050, the marginal cost is $50. The contribution to fixed costs and profit. This is the revenue gained from selling a product less its variable direct costs. This is not the same as profit, which can only be calculated later on overheads have also been deducted. For example, if that 101st unit with a variable (marginal) cost of $50 is sold for $70, it has made a contribution towards fixed costs of $20. The unit contribution is found as the difference between the sale price ($70) and the extra variable cost ($50), that is $20.