9609 · 5.4.2
Approaches to costing: full, contribution — FAQ
Frequently asked questions for 9609 Approaches to costing: full, contribution. Direct answers first, then deeper explanation — then practise with marking.
Why does break-even analysis use contribution costing?
Break-even analysis focuses on determining the sales volume needed to cover all fixed costs. Contribution per unit represents the exact amount each sale contributes towards covering these fixed costs. Using full cost would be inappropriate as it includes an allocated portion of fixed costs, which would distort the calculation.
Can inventory valuation differ between the two methods? Why does it matter?
Yes, significantly. Under absorption costing, closing inventory is valued at its full production cost, including a share of fixed overheads. Under marginal costing, it's valued only at its variable production cost. This difference affects the cost of goods sold and, consequently, the reported profit for a period, especially when inventory levels change.