Business – 5.4 Costs – Approaches to costing | e-Consult
5.4 Costs – Approaches to costing (1 questions)
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Contribution costing (also known as marginal costing) treats only variable costs as product costs and treats fixed costs as period costs.
- Short‑run decision making (e.g., accepting a special order): Only the additional variable cost of producing the order matters; fixed costs are already incurred, so contribution margin determines profitability.
- Product mix optimisation when capacity is limited: The contribution per unit of scarce resources (e.g., machine hours) is used to rank products, ensuring the highest overall contribution is achieved.
In both cases the focus is on the incremental contribution to covering fixed costs and generating profit, making contribution costing the most relevant tool.