Contribution

Posted in Finance, Accounting and Economics Terms, Total Reads: 674
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Definition: Contribution

Contribution is defined as the amount remaining after subtracting the direct costs like labour, material, project staff, salary, etc from the revenue. It contributes to the net income after taking care of the indirect costs like rent, wages, electricity, etc. In other words, contribution refers to the amount remaining after variable costs like selling and admin expenses have been deducted from the sales revenue. This amount is then used to settle the fixed costs and again contributes to the net income.

 

Formula :

Contribution = Sales revenue – Variable costs

= Sales revenue – direct costs

 

Where, sales revenue = number of goods sold * cost per good sold

 

Example – Suppose that company X sells 100 items for Rs 10 each. If Rs 200 is spent on the material for manufacturing those goods, Rs 150 is given away as salary and Rs 100 is spent on the labour, then the contribution is given by

Contribution = 100*10 – 200 -150 – 100

= 1000 – 450

= Rs 550

 

After subtracting the indirect costs from this contribution, the remaining amount will form the net income.

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