Management Accounting Revision Article Series
Contribution analysis is a profit analysis method designed to show the amount of contribution to profit from each product unit.
Original knol - http://knol.google.com/k/narayana-rao/contribution-analysis/2utb2lsm2k7a/ 63
Contribution analysis is a profit analysis method designed to show the amount of contribution to profit from each product unit.
Contribution analysis is a profit analysis method designed to show the amount of contribution to profit from each product unit.
In this method of analysis, the total overheads are divided into fixed overhead and variable overheads. Product costs are determined by charging only variable overhead costs. Contribution is calculated as the difference between the revenue of the product and product cost that includes only direct costs and variable overhead costs.
The total contribution from all the products is determined and then profit is calculated as the difference between the contribution and the fixed overhead cost of the firm.
The effort of the firm is to see that there are no negative contribution products and to increase contribution from the various products so that the total estimated contribution is more than the fixed overhead cost to give the desired profit.
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