Shri Vile Parle Kelavani Mandal’s

Narsee Monjee College of

Commerce and Economics(Autonomous)

Name of the Course: Cost Accounting

T. Y.B. COM–SEMESTER–VI(2022-23)

Title of the Project/ Assignment: Contribution -Meaning, Significance, uses

in industry. Explain how Contribution is different from Profit?

Submitted by:

Sr. No. Full Names of SAPID Division Contact Content

the of the Number Roll No. Number Contributed
Learners (page no.)
1 Deeti Shah 45208200501 D066 8080101020 Contribution;
Meaning,
overview (2,3)
2 Devanshi Shah 45208200665 D067 9773940191 Significance, how
to calculate, uses in
industry (4,5)
3 Hetavi Shah 45208200338 D068 9136336965 Contribution:
illustration (6,7)
4 Hetvi Shah 45208200168 D069 7900101880 profit meaning and
illustration (8,9)
5 Hetvi Shah 45208200611 D070 9137977570 how Contribution
is different from
Profit (10,11)
 MEANING, DEFINITION AND OVERVIEW – D066 DEETI SHAH

Contribution is that the quantity of earnings remaining in the end direct prices are ablated
from revenue. This remainder is that the quantity accessible to pay money for any mounted
prices that a business incurs throughout a coverage amount. Any way over contribution over
mounted prices equals the profit attained.

Direct prices square measure any prices that change directly with revenues, like the value of
materials and commissions. for instance, if a business has revenues of $1,000 and direct
prices of $800, then it's a residual quantity of $200 that may be contributed to the payment of
mounted prices. This $200 quantity is that the contribution arising from operations.

The contribution thought is typically spoken as contribution margin, that is that the residual
quantity divided by revenues. it's easier to judge contribution on a share basis, to ascertain if
there square measure changes within the proportion of contribution to revenues over time.

Contribution ought to be calculated victimization the method of accounting of accounting, so

all prices associated with revenues square measure recognized within the same amount
because the revenues. Otherwise, the number of expense recognized could incorrectly
embrace prices not associated with revenues, or not embrace prices that ought to be
associated with revenues.

CONTRIBUTION INCLUDES:

The contribution thought is beneficial for determinative the bottom potential value purpose at
that product and services ought to be charged, and still cowl all mounted prices. Thus, a close
information of contribution is beneficial within the following situations:

• Pricing: Special valuation deals ought to be designed to yield some quantity of

contribution; otherwise a corporation is actually losing cash when it makes a procurement.
this is often a specific concern once customers need to position large-volume orders at a
coffee value.

• Capital expenditures: Management will estimate however expenditures for mounted

assets alter the number of direct prices incurred, and the way this impacts profits. for
instance, AN expenditure for a golem will scale back direct labor prices, however will
increase mounted prices.

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• Budgeting: The management team will use estimates of sales, direct prices, and stuck
prices to forecast profit levels in future periods.

A common outcome of contribution Analysis is a raised understanding of the amount of units

of product that has got to be sold-out so as to support an progressive increase in mounted
prices. this data may be wont to drive down mounted prices or increase the contribution
margin on product sales, thereby fine-tuning profits.

WHAT IS CONTRIBUTION MARGIN?

The contribution margin may be declared on a gross or per-unit basis. It represents the
progressive cash generated for every product/unit sold-out once deducting the variable
portion of the firm's prices.

The contribution margin is computed because the asking price per unit, minus the variable
value per unit. additionally referred to as greenback contribution per unit, the live indicates
however a specific product contributes to the profit of the corporate.

It provides a technique to indicate the profit potential of a specific product offered by a

corporation and shows the portion of sales that helps to hide the company's mounted prices.
Any remaining revenue left once covering mounted prices is that the profit generated.

CONTRIBUTION MARGIN VS. EARNINGS MARGIN

The contribution margin is totally different from the earnings margin, the distinction between
sales revenue and therefore the value of products sold-out. whereas contribution margins
solely count the variable prices, the earnings margin includes all of the prices that a
corporation incurs so as to form sales.

The contribution margin shows what quantity further revenue is generated by creating every
further unit product once the corporate has reached the breakeven purpose. In alternative
words, it measures what quantity cash every further sale "contributes" to the company's total
profits.

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 SIGNIFICANCE OF CONTRIBUTION MARGIN – D067 DEVANSHI SHAH

Contribution theory aids in figuring out the break-even point, the profitability of various
departments and goods, choosing the right product mix to maximize profits, and setting
selling prices under a variety of conditions, including price discrimination, trade depression,
and export sales. Contribution is the definite test for determining if a product or process is
worthwhile to continue among different products or processes or not.

Specifically, it helps a company understand the contribution of individual business lines or

different products by calculating the contribution margin of each in terms of dollars and
percentages. Direct and variable costs associated with the manufacturing process are
deducted from the revenue to arrive at the contribution margin.

Assume that a business's contribution from its products is 10%, which is lower than its other
contributions. A corporation might ultimately opt to discontinue this product if it is unable to
reduce the variable expenses of it.

Additionally, contribution analysis is carried out to identify the advantages and disadvantages
of the service or product. It also explains how each unit contributes to the recovery of fixed
income expenses. The managers take into account the impact of both internal and external
elements during contribution analysis.

HOW TO CALCULATE CONTRIBUTION MARGIN :

Contribution or contribution margin is the difference between sales revenue and total variable
costs irrespective of manufacturing or nonmanufacturing.

Contribution (C) = Sales Revenue (S) Total Variable Cost (V)

It is obtained by taking the sales revenue and subtracting the variable costs. It can also be
described as the surplus of sales proceeds over variable expenses. Given this challenge, the
contribution acts as a gauge of how effectively distinct company sectors are operating. It is
employed to initially recover the fixed costs. Profits would be any amount that exceeded
contributions above fixed costs. Let’s look at an illustration below:

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EXAMPLE :

Let's take a look at how this would actually function with a sporting goods company as an
illustration. Consider a basketball to be worth £20, with variable cost of £14. Therefore, we
can apply the following formula to determine the contribution margin:

20 – 14 = 6
What does that mean? Essentially, it indicates that for this company, the contribution margin
for each basketball is 6 cents.

Let's now consider another illustration. Imagine that the same business generated variable
costs of £20,000 and sold basketballs valued at about £50,000 during the time period.
However, the business also has £40,000 in fixed expenses. To determine the impact on their
bottom line, we can utilize the contribution margin formula :

50,000 – 20,000 = 30,000

The company's fixed expenses (premises, labour, insurance, etc.) result in a net loss of
$10,000 even though the contribution margin is £30,000. As a result, if companies wish to be
solvent and afloat, businesses either reduce their fixed costs or raise their pricing.

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 USES OF CONTRIBUTION – D068 HETAVI SHAH

The contribution construct is beneficial for decisive the bottom potential value purpose at that
merchandise and services ought to be charged, and still cowl all fixed prices. Thus, an in
depth information of contribution is beneficial within the following situations:

Pricing. Special evaluation deals ought to be designed to yield some quantity of contribution;
otherwise a corporation is basically losing cash when it makes a purchase. this can be a
selected concern once customers need to position large-volume orders at a coffee value.

Capital expenditures. Management will estimate however expenditures for fixed assets alter
the quantity of direct prices incurred, and the way this impacts profits. as an example,
associate expenditure for a golem will scale back direct labour prices, however will increase
fixed prices.

Budgeting. The management team will use estimates of sales, direct prices, and glued prices
to forecast profit levels in future periods.

ADVANTAGES OF CONTRIBUTION:

A common outcome of contribution associate lysis is associate exaggerated understanding of

the amount of units of product that has got to be oversubscribed so as to support an
progressive increase in fixed prices. this information may be wont to drive down fixed prices
or increase the contribution margin on product sales, thereby fine-tuning profits.

1. It supplies information to the management to take decision whether a particular

product may be purchased from outside or the same may be manufactured by a firm i.e., to
make or buy decision.
2. It also helps the management to select the best component of production, i.e., which
gives higher contribution will be selected.
3. It helps the management to know the BEP (Break Even Point) (i.e., whether there will
be no profit or no loss).
4. Selling price of the product may reasonably and justifiably be determined on the basis
of contribution so ascertained.
5. It also helps the firm to know the role of variable overhead and fixed overhead and to
understand whether any of them may be reduced in order to reduce the total cost per unit so
that profit will be maximised.

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Contribution analysis helps compare however individual merchandise area unit profitable to
the corporate and is straightforward to use.

The significance of contribution analysis is that it indicates the profit of every product and
helps you perceive the varied elements and specific external and internal factors that
influence a company’s financial gain, and it utilizes existing data.

DISADVANTAGES OF CONTRIBUTION ANALYSIS

Some disadvantages of contribution analysis area unit that its assumptions area unit
unrealistic:

1.The total costs cannot be easily segregated into fixed costs and variable costs.

2. Moreover, it is also very difficult to per-determine the degree of variability of semi-

variable costs.

3. Under marginal costing, the fixed costs remain constant and variable costs are varying
according to level of output. In reality, the fixed costs do not remain constant and the variable
costs are not varying according to level of output.

4. There is no meaning in the exclusion of fixed costs from the valuation of finished goods
since the fixed costs are incurred for the purpose of manufacture of products.

5. In the case of loss by fire, the full amount of loss cannot be recovered from the insurance
company since the stocks are under valued.

7. The calculation of variable overheads does not include all the variable overheads.

8. The profit fluctuates as per the fluctuation of sales volume. Hence, the preparation of
periodic operating statements becomes unrealistic.

9. The elimination of fixed costs renders cost comparison of jobs difficult.

10. The management cannot take a quality decision with the help of contribution alone. The
contribution may vary if new techniques followed in the production process.

11. The fixed costs are constant only for short period. In the long run, all the costs are
variable.

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 PROFIT: MEANING, DEFINITION AND CONTENT– D069 HETVI SHAH

Marginal profit is the profit earned by a firm or individual when one additional or marginal
unit is produced and sold. Marginal refers to the added cost or profit earned with producing
the next unit. Marginal product is the additional revenue earned while the marginal cost is
the added cost for producing one additional unit.

Marginal profit is the difference between marginal cost and marginal product (also known
as marginal revenue). Marginal profit analysis is useful for managers because it aids in
deciding whether to expand production or to slow down stop production altogether, a
moment known as a shutdown point.

Under mainstream economic theory, a company will maximize its overall profits when
marginal cost equals marginal revenue, or when marginal profit is exactly zero.

Marginal profit is different from average profit, net profit, and other measures of
profitability in that it looks at the money to be made on producing one additional unit. It
accounts for the scale of production because as a firm gets larger, its cost structure changes,
and, depending on economies of scale, profitability can either increase or decrease as
production ramps up.

If the marginal profit of a firm turns negative, its management may decide to scale back
production, halt production temporarily, or abandon the business altogether if it appears that
positive marginal profits will not return.

Marginal cost (MCMC) is the cost to produce one additional unit, and marginal revenue
(MR) is the revenue earned to produce one additional unit.

Marginal profit (MP) = Marginal revenue (MR) - marginal cost (MCMC)

In modern microeconomics, firms in competition with each other will tend to produce units
until marginal cost equals marginal revenue (MCMC=MR), leaving effectively zero
marginal profit for the producer. In fact, in perfect competition, there is no room for
marginal profits because competition will always push the selling price down to marginal

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cost, and a firm will operate until marginal revenue equals marginal cost; therefore, not only
does MC = MP, but also MC = MP = price.

If a firm cannot compete on cost and operates at a marginal loss (negative marginal profit), it
will eventually cease production. Profit maximization for a firm occurs, therefore, when it
produces up to a level where marginal cost equals marginal revenue, and the marginal profit
is zero.

It is important to note that marginal profit only provides the profit earned from producing
one additional item, and not the overall profitability of a firm. In other words, a firm should
stop production at the level where producing one more unit begins to reduce overall
profitability. Variables that contribute to marginal cost include:

• Labor
• Cost of supplies or raw materials
• Interest on debt
• Taxes

Fixed costs, or sunk costs, should not be included in the calculation of marginal profit since
these one-time expenses do not change or alter the profitability of producing the very next
unit.Sunk costs are costs that are unrecoverable such as building a manufacturing plant or
buying a piece of equipment. Marginal profit analysis does not include sunk costs since it
only looks at the profit from one more unit produced, and not the money that has been spent
on unrecoverable costs such as plant and equipment. However, psychologically, the
tendency to include fixed costs is hard to overcome, and analysts can fall victim to the sunk
cost fallacy, leading to misguided and often costly management decisions.Of course, in
reality, many firms do operate with marginal profits maximized so that they always equal
zero. This is because very few markets actually approach perfect competition due to
technical frictions, regulatory and legal environments, and lags and asymmetries of
information. Managers of a firm may not know in real-time their marginal costs and
revenues, which means they often must make decisions on production in hindsight and
estimate the future. Additionally, many firms operate below their maximum capacity
utilization in order to be able to ramp up production when demand spikes without
interruption.

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 DIFFERENCE BETWEEN CONTRIBUTION AND PROFIT – D070 HETVI SHAH

Profit

All organisations that are run with the objective of making a profit will complete a profit and loss
report at the end of each financial period. This will show the revenue they have received, the amount
that has been paid out in expenses, and the remaining amount of profit that has been made.

The profit and loss report takes into consideration all types of sales for all products and services. It
also takes into account all the expenses of running the business, including both variable and fixed
costs.

Variable costs are those that vary with the amount of output by the business. This includes the wages
of staff involved in production, as well as the materials used to make products.

Fixed costs are those that remain the same regardless of the amount of product that is made. This
includes things like rent, rates, salaries, fuel, and depreciation.

Let’s look at an example:

Sales for the year are a total of ₹50,000.

The cost of sales is ₹15,000.
This means a gross profit of ₹35,000 has been made.

There are then running costs of the business:

Premises costs are ₹20,000, Motor expenses are ₹5,000, Other expenses are ₹3,000. This leaves a
net profit of ₹7,000.

The cost of sales represents the costs that are directly attributed to a sale, such as the material used in
the production of the product. The running costs, on the other hand, are business overheads that are
not directly attributed to the sale

Contribution

As well as overall profit, organisations are often interested in the of contribution of specific products
towards paying fixed costs and making a profit.

It’s possible to calculate contribution per unit, or for the total number of units that are expected to
sell. To calculate contribution per unit, you use the sales price per unit, minus variable cost per unit.

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Here’s an example:

Company A makes a product that they sell for ₹25 per unit.
The direct cost of sale related to each unit is materials of ₹7 and labour of ₹10.
₹25 - ₹7 - ₹10 leaves a contribution of ₹8 per unit. This goes towards paying off the fixed costs.
Once the fixed costs are paid off, any further contribution goes towards profit.

No. Contribution Profit

1 It includes fixed cost and profit.
2 Marginal costing technique uses the
concept of contribution.
3 At break-even point, contribution is
equals to fixed cost.
4 Contribution concept is used in
managerial decision making.
It does not includes fixed cost and profit.
Profit is the accounting concept to
determine profit and loss of a business
concern.
Only sales in excess of break-even points
result in profit
Profit is computed to determine the
profitability of product and the concern.

Once the contribution has been calculated, you can use this amount to calculate the break-even point,
which will tell you how many units you need to produce in order to make a profit or loss. To calculate
the break-even point, you take the contribution per unit and divide it by the total fixed costs. This will
show how many units you need to sell to cover the fixed costs, thus making neither a profit or a loss.

The difference, therefore, between contribution and profit is that contribution shows the difference
between the sales price and variable costs for specific products. This then contributes to the fixed
costs, and goes towards the profit of the business.

Profit, on the other hand, is the difference between sales and costs for the whole of the business. The
profit can either be reinvested into the business, or taken out as dividends.

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