9609 · 5.4.2
Approaches to costing: full, contribution
**Full vs contribution costing** (5.4.2) is a foundational topic for management accounting, essential before tackling **break-even analysis (5.4.4)**. Cambridge questions frequently test your ability to identify **which method applies** to a given scenario, not just your ability to perform the calculation. The key distinction is: contribution costing for short-run decisions, and full costing for long-run strategy and financial reporting.
Need to know
What you need to know
- **Special order:** Accept if the order price exceeds the variable cost, as it will generate a positive contribution towards fixed costs (assuming spare capacity exists).
- **Limiting factor:** When a resource is scarce, rank products by **contribution per unit of the scarce resource** (e.g., contribution per machine hour) to maximise profit.
- **Decision Rule:** Do not use the full unit cost to reject a special order that earns a positive contribution. The allocated fixed costs are irrelevant for this short-term decision.
Explanation
Approaches to costing: full, contribution
- **Special order:** Accept if the order price exceeds the variable cost, as it will generate a positive contribution towards fixed costs (assuming spare capacity exists).
- **Limiting factor:** When a resource is scarce, rank products by **contribution per unit of the scarce resource** (e.g., contribution per machine hour) to maximise profit.
- **Decision Rule:** Do not use the full unit cost to reject a special order that earns a positive contribution. The allocated fixed costs are irrelevant for this short-term decision.