Contribution Analysis – A summary of the activity

Costs incurred in an organization can be classified under fixed or variable costs based on the its relationship with certain cost drivers like the volume of output produced, number of units sold etc. Variable costs posses a linear relationship with such cost drivers, whereas, fixed costs are independent. Immaterial of the volume of the output, fixed costs can be considered incidental.

Contribution is defined as the difference between the revenue and the costs, which vary with the volume of the cost driver i.e. the variable costs. This difference contributes towards the recovery of the fixed costs and ultimately towards the profit.

Contribution analysis recognizes the operating income available after meeting the variable costs, to contribute for the fixed costs and to yield profit. This analysis helps to identify and study the behavioral patterns of both the revenues and costs and helps in planning and enforcing cost control especially the fixed costs because many a times fixed costs absorbs a major portion of the gross income yielding a very less net profit.

Contribution analysis report can be of two types:

• Cost Center wise Contribution Analysis Report: Analysis can be made for detailed cost centers and group cost centers for specified period(s). If the report is for a group cost center, then reference to a cost center structure for including the balances, becomes mandatory.

• Item-wise Contribution Analysis Report: An item-wise analysis report can be configured and generated with all the cost centers for which specific items are generating revenue.

This activity allows you to create a contribution analysis report. You can create a cost center wise contribution analysis report in the “Contribution Analysis” page. If an item-wise contribution analysis report is to be generated then the corresponding details must be specified in the “Distribute Normal Cost Element” page.

This activity also allows you to generate a sensitivity analysis report in order to perform a what-if analysis. In this report, the figures of contribution can be compared against three sets of alternate rates and quantities. Note that, data entry in all these three pages must be sequential.

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