Income Statement Using The Contribution Margin Format

The various different advantages related to the contribution margin income statement are as follows.

Income statement using the contribution margin format. The contribution margin income statement is a useful tool when analyzing the results of a previous period. A contribution margin income statement is an income statement in which all variable expenses are deducted from sales to arrive at a contribution margin from which all fixed expenses are then subtracted to arrive at the net profit or net loss for the period. The contribution margin income statement separates variable and fixed costs in an effect to show external users the amount of revenues left over after variable costs are paid in other words this is a special income statement format that lists variable costs and fixed costs in order to calculate the contribution margin of the company. This difference of treatment of two types of costs affects the format and uses of two statements.

Layout of the contribution margin income statement. Materials supplies your variable overhead subtract your variable selling expenses as well as your variable administrative expenses. The basic difference between a traditional income statement and a contribution margin income statement lies in the treatment of variable and fixed expenses. This format is called the contribution margin format for an income statement because it shows the contribution margin contribution margin is defined as sales revenue less variable expenses notice that all variable expenses are direct expenses of the segment.

The second subtotal in the contribution margin format income statement is the segment s contribution to indirect expenses. The biggest difference on the contribution margin format income statement is the separation of certain expenses. Looking at this statement it can be easily understood as to which business activity is resulting in a revenue leak. The resulting value is sometimes referred to as operating income or net income.

A company may use multiple formats to prepare an income statement. Simply laid out this is the format needed to develop a contribution margin income statement. Add sales subtract variable costs of production e g. In this article we shall discuss two main differences of two income statements the difference of format and the difference of usage.

It is simple and easy to use the statement as it involves simple calculations where in order to derive contribution variable cost is deducted from the sales and in order to derive the profits fixed cost is further subtracted from the derived contribution margin. The contribution format centers on the idea that each unit sold provides a certain amount of contribution margin that goes to covering fixed costs. This statement tells you whether your efforts for the period have been profitable or not. The page 33 income statement is set using a contribution format.

The page 50 income statement uses the absorption format. The contribution margin income statement is a special format of the income statement that focuses on expenses that are bifurcated for better understanding.