(A) XX glass limited has been in operation for the past seven years and manufactures shower doors. Since its establishment, the company has used a traditional overhead absorption costing system. However, the managing director, Peter Kenny, is considering making a change.
The contribution is the difference between the selling price and variable cost (or marginal cost) is known as `contribution’ or `gross margin’. It may be considered as some sort of fund from out of which all fixed costs are met. The difference between contribution and fixed cost represents either profit or loss, as the case may be.
The contribution is calculated using the following formula:
Contribution = Selling Price – Variable Cost= Fixed Cost + Profit Or – Loss
An abnormal loss is also called an uncontrollable loss. It is a loss that is not expected to occur under efficient operating conditions.
It is not considered an inherent part of the production process because it arises from inefficiencies and is not included in the process costs. An example would be incorrect mixing of ingredients or cutting of fabric.