Which option demonstrates the all-variable-costs concept used for contribution in marginal costing?

Which option demonstrates the all-variable-costs concept used for contribution in marginal costing?

• A. Sales minus all variable costs
• B. Sales minus variable costs
• C. Sales minus fixed costs
• D. Sales minus total costs

Answer: (A)

Contribution in marginal costing is what remains from sales after deducting every cost that varies with output. By subtracting all variable costs, you capture the full amount available to cover fixed costs and then contribute to profit. This includes variable production costs and any variable selling or distribution costs. If you were to subtract only some variable costs or switch to subtracting fixed costs, you’d lose the true amount that goes toward fixed costs and profit, since those are determined after all variable costs are covered. Subtracting fixed costs gives a figure that reflects profit after the contribution has been applied, while subtracting total costs would yield net profit, not contribution. For this reason, the all-variable-costs approach—sales minus all variable costs—best represents the contribution in marginal costing. For example, if selling price is 100 and all variable costs total 60, the contribution is 40, which is the amount available to cover fixed costs and contribute to profit.

Contribution in marginal costing is what remains from sales after deducting every cost that varies with output. By subtracting all variable costs, you capture the full amount available to cover fixed costs and then contribute to profit. This includes variable production costs and any variable selling or distribution costs. If you were to subtract only some variable costs or switch to subtracting fixed costs, you’d lose the true amount that goes toward fixed costs and profit, since those are determined after all variable costs are covered. Subtracting fixed costs gives a figure that reflects profit after the contribution has been applied, while subtracting total costs would yield net profit, not contribution. For this reason, the all-variable-costs approach—sales minus all variable costs—best represents the contribution in marginal costing. For example, if selling price is 100 and all variable costs total 60, the contribution is 40, which is the amount available to cover fixed costs and contribute to profit.