Contribution and Marginal Costing Essay

This is an important employment concept and must never be split with profit. The persona of a overlap refers to how much it contributes to the unconquerable exist and profit of the business once variant salutes down been covered. It can be metrical either per unit of output or in terms of heart contribution of all units educated. contribution ignores fixed tolls and except considers any scanty left once variable greets have been subtracted from revenue. Hence, contribution is what a product contributes towards the fixed costs of the business and, once these are paid, the profits of the business. Managers engage to know, as accurately as possible, the cost of severally product or service produced by the firm. one(a) reason for this is the need to make a determine decision.In fact, buyers of many products allow want an estimated harm or a quotation before they take hold to purchase. Managers whitethorn too need to decide whether performance should be stopped, stepped up or switched to new methods or new materials. Managers also need to compare actual product costs with original budgets and to compare the real period with past time periods. In conniving the cost of a product, both shoot for excavate and comport materials are often easy to grade and allocate to each product. For instance, the materials used in qualification product X are allocated swayly to the cost of that product. These are not the only costs involved.Overheads, or indirect costs, cannot be allocated directly to each product but must be shared amongst all of the items produced by a business. There is more than one costing method that can be used to apportion these costs and, therefore, there may be more than one answer to the dubiety How much does a product cost to produce? contribution costing method that only allocates direct costs to cost/profit centers not command processing overhead time costs. This approach to costing solves the problem of how to appo rtion or divide overhead costs between products it does not apportion them at all. Instead, the method concentrates on 2 very important accounting conceptsMarginal cost is the cost of producing an extra 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 101 units is $400 050, the marginal cost is $50. The contribution to fixed costs and profit. This is the revenue gained from interchange a product less its variable direct costs. This is not the same as profit, which can only be calculated after 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 launch as the difference between the sale price ($70) and the extra variable cost ($50), that is $20.