CIMA P1 Syllabus A. Cost Accounting For Decision And Control - The Concept Of Contribution - Notes ^{3 / 10}

Marginal Costing

Marginal costing is an alternative method of costing to absorption costing. 

In marginal costing, only variable production costs are charged 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

Contribution is of fundamental importance in marginal costing, and 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 the Total Contribution, using Marginal Costing.

Solution

Contribution $40-$20-$10-$3 = $7/unit

Total contribution = $7 x 100 units = $700