Contribution Analysis

Contribution analysis is an approach used to assess the contribution of a particular program to its intended goal.

What is contribution analysis?

Contribution analysis is used in estimating how direct and variable costs of a product affect the final income of a company. The study addresses the issue of identifying simple or overhead costs related to several production projects. Contribution analysis greatly aids a company to take into account all fixed, direct and variable costs incurred during the manufacturing process which is then subtracted from the resulting revenue. This is, therefore, a very crucial procedure in the growth of a business.

The Pros

Contribution analysis helps in the assessment of how individual products are profitable to the company.

The significance of contribution analysis is that it gives certainty to the shares of each product and makes you understand why the results are so. Contribution analysis clearly provides the specific external and internal factors that have an influence on a company’s income.

The Cons

Some problems might come up when using this approach regarding;

  • Real life evaluations
  • Confirmation of the  theories involved
  • Relating the observation made by reducing uncertainty

Steps Involved

There are six steps that must be followed as proposed by John Mayne;

  1. Identify the problem to be assessed. –  This means pointing out the target that you want to see the changed.
  2. Come up with a change theory and model – this means that you should come up with relevant policies with respect to the problem identified. This will help in understanding how the policies formulated going to help in influencing change.
  3. Gather enough data on the model – it is important to get the existing evidence on the model formulated to ensure that it will be effective.
  4. Assess  the performance based on the data collected and evidence- one way of getting the required evidence is through stakeholders and  witnesses
  5. Dig up additional evidence- this is the stage where new data and evidence is added to the already existing information so that nothing is missed out.
  6. Revising the performance data and records- this process will help in the rectification of the weaknesses and improvement of the strengths.

More Reading