Business – 5.4 Costs – Approaches to costing | e-Consult
5.4 Costs – Approaches to costing (1 questions)
Login to see all questions.
Click on a question to view the answer
Answer:
- Contribution is the amount remaining after variable costs have been deducted from sales revenue. It is calculated as Sales – Variable Costs and shows how much is available to cover fixed costs and then generate profit.
- Profit is the amount remaining after both variable and fixed costs have been deducted from sales revenue. It is calculated as Sales – Variable Costs – Fixed Costs.
- Contribution is a per‑unit or total figure that indicates the ability of sales to cover fixed costs, whereas profit is the final bottom‑line result after all costs are accounted for.
- Contribution is used for short‑term decision making (e.g., pricing, product mix) because it isolates variable costs, while profit is used for overall performance evaluation and long‑term planning.
- Contribution can be expressed as a ratio (Contribution Margin Ratio) to assess the proportion of each sales pound that contributes to fixed costs, whereas profit does not have a comparable ratio.