The Income|Outcome^® Contextuary

Contribution is what’s left from the Sales after allowing for the Direct Cost for goods and services (e.g. Cost of Sales or 'materials and labor'); it contributes toward paying for the overhead costs and expenses of the business.

Contribution Margin indicates the percentage of Sales that remains after covering the Direct Costs.

Contribution = Sales - Cost of Sales (COS)

Contribution Margin = Contribution/Sales as a percentage

“What do you mean by that?”

Some people use the two terms (Contribution and Contribution Margin) interchangeably.

Further, some people use Contribution to be the same term as Gross Profit; others may use the term earlier (e.g. higher up) on the Income Statement.

• If Factory Overheads are allocated to Cost of Sales (COS) or Cost of Goods Sold (COGS), Contribution and Gross Profit will be the same number.

• Alternatively, if the company first calculates Contribution as (Sales - Direct Costs); it will then subtract the Factory Overheads to calculate Gross Profit.

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