ACCA Performance Management (F5) Certification Practice Exam

What is the formula for contribution in cost accounting?

1. Revenue - Variable costs

2. Profit + Fixed costs

3. Sales - Operating expenses

4. Sales - Cost of goods sold

The correct answer is: Profit + Fixed costs

The concept of contribution in cost accounting refers to the amount remaining from sales revenue after variable costs have been deducted. It is essential for understanding how sales contribute to covering fixed costs and generating profit. Therefore, the correct formula for contribution is derived from revenue minus variable costs. The formula can be stated simply as: Contribution = Revenue - Variable Costs This definition is vital because it helps businesses determine how much each product contributes to fixed costs and overall profitability. By focusing on variable costs alone, it isolates the impact of sales on profitability, which is particularly useful in decision-making concerning pricing, cost control, and product mix. In this context, considering other options, the formula presented in option B (Profit + Fixed costs) does not directly relate to the definition of contribution, as it focuses on total profitability rather than the contribution margin itself. The other options, which explore different formulations connected to revenue and expenses, are also not specifically aligned with the concept of contribution as it is understood in cost accounting. Hence, knowing the precise formulation of contribution helps in performing break-even analysis and strategic financial planning.