Question

Contribution in Marginal costing=........................

• A. Sales-Fixed cost
• B. Total cost-Profit margin
• C. Sales-Variable cost
• D. Sales-Break even sales

Answer 1

Answer:

C. Sales-Variable cost

Marginal Costing and Contribution

Definition

• The Contribution in marginal costing is the difference between the sales revenue and the variable costs.
• It represents the amount of money available to cover fixed costs and contribute to profit.

Formula

• Contribution = Sales Revenue - Variable Costs

Key Concepts in Marginal Costing

• Marginal Costing: A costing technique where all fixed costs are treated as period costs and are not absorbed into the cost of individual products. Only variable costs are considered as product costs.
• Variable Costs: Costs that change in direct proportion to the volume of production or sales (e.g., direct materials, direct labor, variable overheads).
• Fixed Costs: Costs that remain constant regardless of the volume of production or sales within a relevant range (e.g., rent, salaries, depreciation).

Significance of Contribution

• Contribution Margin Ratio: Contribution divided by Sales Revenue. This ratio indicates the percentage of each sales dollar that contributes to covering fixed costs and generating profit.
• Break-Even Point (BEP): The point where total contribution equals total fixed costs, resulting in zero profit. BEP (in units) = Fixed Costs / Contribution per Unit. BEP (in sales value) = Fixed Costs / Contribution Margin Ratio.
• Profitability Analysis: Contribution helps in analyzing the profitability of different products or sales levels. A higher contribution per unit or ratio generally indicates better profitability.
• Decision Making: Management uses contribution analysis for various decisions like pricing, product mix, make-or-buy decisions, and special order acceptance.

Example

• If a company has sales of ₹100,000 and variable costs of ₹40,000, the contribution is ₹60,000 (₹100,000 - ₹40,000). This ₹60,000 is available to cover fixed costs and contribute to profit.

Relevance to Competitive Exams

• Questions often test the understanding of the contribution formula, its calculation, and its application in break-even analysis and profitability assessments.
• Understanding the relationship between sales, variable costs, fixed costs, contribution, and profit is crucial.