Marginal costing and absorption costing

Contribution:

Contribution is the difference between sales value and the marginal cost of sales.

Contribution towards covering fixed overheads and making profit.

Summary:

If total contribution exceeds fixed cost, a profit is made.

If total contribution exactly equals  fixed costs, no profit and no loss is made. This is known as the Breakeven Point

If total contribution is less than fixed cost, there will be a loss.

Advantage of contribution

The main advantage of contribution is that it allows an easy calculation of profit if sales increase or decrease from a certain level.

     
      Calculation of profit under Marginal costing and Absorption costing

    

     In marginal costing ,fixed production costs are treated as period cost and are    written off as they are incurred.

     In absorption costing , fixed production cost are absorbed into the cost of units and are carried forward in inventory to be charged against sales for the next period.