Marginal/Contribution Costing 

Another method of costing is to use marginal costing. We have to look at the contribution to fixed costs that each product achieves. 

Contribution = revenue - variable costs
Fixed costs are left unallocated. The contribution of each centre is calculated. This contributes towards the fixed costs.
 
Product A Product B Product C Total
Revenue 100 60 30 190
Variable Costs 60 30 10 100
Contribution 40 30 20 90
 
£
Total Contribution 90
Fixed Costs 60
Profit 30

Contribution costing is useful for deciding whether to accept on off orders (known as 'special order decisions'). Providing that the order makes a positive contribution towards indirect costs, it will either increase profits or reduce losses.

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