Difference Between Contribution Margin and Gross Margin
Basis | Contribution Margin | Gross Margin |
---|---|---|
Definition | This is the amount of sales income that can be used to pay for both variable and fixed costs. | Shows how much of the sales income can be used to pay for the direct costs of goods sold (COGS). |
Components Included | IIt includes all prices that can change, like direct labor, raw materials, and variable overhead. | Includes only the direct costs associated with producing or acquiring goods (COGS). |
Purpose and Use | Primarily used for internal decision-making, pricing, and product mix analysis. | Often used for financial reporting as well as external analysis to figure out how efficient output is. |
Coverage of Fixed Costs | Directly helps pay for both variable and fixed costs after changeable costs are paid. | Does not directly contribute to fixed costs; it covers only the direct costs of goods sold. |
Applicability to Services | More applicable to service-based businesses where the concept of direct costs is less clear. | Businesses that make or sell physical things often find this to be more relevant. |