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approach to costing solves the problem of how to apportion or divide overhead costs between products – it does not apportion them at all. Instead Wilson Ramos Rays Jersey , the method concentrates on two very important accounting concepts:

• Marginal cost is the cost of producing an extra unit. This extra cost will clearly be a variable direct cost. For example, if the total cost of producing 100 units is $400 000 and the total cost of producing 101 units is $400 050, the marginal cost is $50.

• The contribution to fixed costs and profit. This is the revenue gained from selling a product less its variable direct costs. This is not the same as profit, which can only be calculated after overheads have also been deducted. For example, if that 101st unit with a variable (marginal) cost of $50 is sold for $70 Wade Boggs Rays Jersey , it has made a contribution towards fixed costs of $20. The unit contribution is found as the difference between the sale price ($70) and the extra variable cost ($50), that is $20.

Contribution costing has very important advantages over full costing when management plans to take important decisions based on cost data. If a business makes more than one product or provides more than one service, contribution costing shows managers which product or service is making the greatest or least contribution to overheads and profit.

• Overhead costs are not allocated to cost centers, so contribution costing avoids inaccuracies and arbitrary allocations of these costs.

• Decisions about a product or department are made on the basis of contribution to overheads – not ‘profit or loss’ based on what may be an inaccurate full-cost calculation.

• Excess capacity is more likely to be effectively used, as orders or contracts that make a positive contribution will be accepted.

• By ignoring overhead costs until the final calculation of the business’s profit or loss Trevor Plouffe Rays Jersey , contribution costing does not consider that some products and departments may actually incur much higher fixed costs than others. In addition, single-product firms have to cover the fixed costs with revenue from this single product, so using contribution costing is unlikely to be so appropriate.

• It emphasizes contribution in decision-making. It may lead managers to choose to maintain the production of goods just because of a positive contribution – perhaps a brand new product should be launched instead which could, in time, make an even greater contribution.

• As in all areas of decision-making Steven Souza Rays Jersey , qualitative factors may be important too, such as the image a product gives the business. In addition, products with a low contribution may be part of a range of goods produced by the firm and to cease producing one would reduce the appeal of the whole range. Buxom Lingerie Tips: How to Say So long to Pantyhose Forever June 22, 2012 | Author: debose98 | Posted in Self Improvement
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