Contribution in cost management refers to the amount of earnings remaining after all direct costs have been subtracted from revenue. This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs equals the profit earned. Direct costs are any costs that vary directly with revenues, such as the cost of materials and commissions.

Contribution margin is a related concept that represents the portion of a products sales revenue that isnt used up by variable costs and so contributes to covering the companys fixed costs. It is computed as the selling price per unit, minus the variable cost per unit. The contribution margin helps to separate out the fixed cost and profit components coming from product sales and can be used to determine the selling price range of a product, the profit levels that can be expected from the sales, and structure sales commissions paid to sales team members, distributors, or commission agents.

The contribution concept is useful for determining the lowest possible price point at which products and services should be charged, and still cover all fixed costs. It is also useful for analyzing the profitability of different products and services, and for making decisions about which products to produce or services to offer. By calculating the contribution margin, managers can determine whether to keep or drop certain aspects of the business.

In summary, contribution and contribution margin are important concepts in cost management that help businesses determine their profitability and make decisions about pricing, product offerings, and resource allocation.