# Contribution Margin Method

This method splits joint cost into its variable and fixed components, then allocates each using a different base — recognising that variable costs follow output but fixed costs are recovered through contribution.

## Two-Stage Allocation

```

TOTAL JOINT COST

│

┌────────┴────────┐

Variable Fixed

Component Component

│ │

Allocate on Allocate on

basis of basis of

No. of Output Contribution

```

## Step-by-Step

1. Split joint cost into variable and fixed parts (given in problem).

2. Variable cost allocation: distribute in ratio of output units (similar to Physical Units Method).

3. Compute contribution per product = Sales − Variable Cost.

4. Fixed cost allocation: distribute in ratio of contributions.

5. Add both to get joint cost per product.

## Critical Rule

> If any product's contribution is ZERO or negative, do NOT allocate joint cost to that product.

This prevents loss-making products from being subsidised by profitable ones via the cost allocation.

Worked example

### Example 1

Example: Total joint cost = ₹1,00,000 (Variable ₹40,000; Fixed ₹60,000).

Outputs: A = 1,000 units @ ₹80 sale price; B = 2,000 units @ ₹50 sale price.

Step 1 — Variable allocation (ratio 1,000:2,000 = 1:2):

Variable to A = 40,000 × 1/3 = ₹13,333
Variable to B = 40,000 × 2/3 = ₹26,667

Step 2 — Contribution:

A: Sales 80,000 − VC 13,333 = ₹66,667
B: Sales 1,00,000 − VC 26,667 = ₹73,333

Step 3 — Fixed allocation (ratio 66,667:73,333):

Fixed to A = 60,000 × 66,667/1,40,000 = ₹28,571
Fixed to B = 60,000 × 73,333/1,40,000 = ₹31,429

Total joint cost:

A = 13,333 + 28,571 = ₹41,904
B = 26,667 + 31,429 = ₹58,096

⚠️ Common exam mistakes

Allocating joint cost to a product with zero contribution — the syllabus explicitly forbids this.
Treating contribution = Sales − Total Cost (it must be Sales − Variable Cost only).
Using a single base (output OR contribution) for both components — the whole point is the dual-base allocation.
Forgetting to split the joint cost between variable and fixed before starting.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Apportioning Joint Costs — Contribution Margin Method

Worked example

⚠️ Common exam mistakes