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Marginal costing-contribution

NIKHITHA (Student) (133 Points)

13 September 2014

Can you please explain the meaning of this line? "The contribution concept is based on the theory that the profit and fixed expenses of a business is a " JOINT COST " which cannot be equitably apportioned to different segments of the business. " How can the profit and expenses be treated as joint cost?why can't they be equitably apportioned?

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Ishaan (CA Final student) (36 Points)
Replied 13 September 2014

Fixed expenses are incurred irrespective of the quantity of products produced. And profit is an expense for the organisation (considering the separate legal entity concept). Profit is like an expense which the entity has to incur for recieving the funds at the beginning from its investors (I.e owners or shareholders). One cannot allocate the profit and fixed expenses to each product produced exactly same everytime. The joint costs incurred also works on the same funda as they cannot also not be allocated exactly between the products and by products manufactured. Though it is quite hypothetical to say that fixed cost and profit are joint cost but it can be said so looking at the accounting principles and logics.

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