CIMA BA2 Syllabus B. COSTING - Contribution - Notes 6 / 9
The Concept Of Contribution
Marginal Costing
Marginal costing only includes variable production costs as a cost of sale.
Therefore, the cost of a unit =
Direct materials + direct labour + variable production overheads
Fixed costs are treated as a period cost, and are charged in full to the income statement of the accounting period in which they are incurred.
Contribution
How do we calculate contribution?
Contribution = Sales price – ALL variable costs
The term 'contribution' is really short for 'contribution towards covering fixed overheads and making a profit'.
Total contribution = contribution per unit x sales volume
Profit = Total contribution – Fixed overheads
Illustration
Calculate Total Contribution
| $per unit | |
|---|---|
| Sales price | 40 |
| Direct materials | 20 |
| Direct labour | 10 |
| Variable production overheads | 3 |
| Sales volume | 100 unit |
Solution
Contribution $40-$20-$10-$3 = $7/unit
Total contribution = $7 x 100 units = $700
If fixed costs for the period were $100, then the final profit would be $700 - $100 = $600