What is the Contribution Margin Income Statement?
Definition: A contribution margin income statement is applicable when calculating the variable expenses of a company, which, more often than not, originate from sales.
Thus, it becomes an income statement showcasing net profit or net loss for the period and must be in line with a certain status of expenses.
Contribution Margin Income Statement Formula & Format
The income statement uses a higher layout of presentation and it involves:
Sales – Variable expenses – administrative expenses & variable selling = Contribution Margin
Contribution Margin – Fixed Production of expenses – Administrative expenses & variable selling = Net Loss or Net Profit.
Contribution Margin Income Statement Components
Fixed Costs: They refer to expenses that remain the same, whether the number of goods or services produced or sold increases or decreases. They are the opposite of variable expenses.
Variable costs/Expenses: They are not always the same, depending on a corporation’s status. Any changes in the level of productivity of the company, whether an increase or a decrease, has a significant effect on the variable.
Revenue: This is derived from all the receipts from sales of goods and services. It amounts to the total income, and its formula includes the number of goods sold multiplied by the price of the goods.
Income: This is achieved by deducting the total costs incurred from the Contribution Margin in a given period.
Contribution Margin: The total sales made during the period less the total variable cost.
Traditional Income Statement vs Contribution Margin Statement
The two statements are somewhat similar because they show a company’s status quo in its profit or loss. However, the process of arriving at the net and loss figures is different.
An old income statement outlines a company’s profitability during a certain period of accounting. In most cases, it is an account of how a company generated its revenue and how its expenses came along. This applies to both operating and non-operating activities. We have explained earlier what a contribution margin income statement is all about.
Unlike a traditional income statement, which separates product costs from period costs, a contribution margin income statement is inclined towards the separation of variable costs from fixed costs. Additionally, while a contribution margin income statement applies variable costing; a traditional income statement applies full costing, which ends up incorporating the cost of goods sold.
Another difference is that contribution margin income statements are used by analyzing and tally the performance of independent products or in categories. It is how managers and stakeholders can obtain more details on a given product and whether or not it needs more finances to improve their performance. Traditional income statements are primarily used for external reporting.
Why would a company use a contribution margin income statement more often?
For an analysis of its performance, given that it brings out the expenses both variable and fixed. Through them, it can put together a breakeven analysis.
It is not only simple but also easy to use, thanks to its straight forward calculations, which are all about variable cost, sales, and fixed costs.
It offers a more comprehensive and thoughtful understanding of operations; thus, a company can easily pick on areas, which require immediate or future changes for purposes of profit-making.
Its drawback includes the fact that it is only internal persons of the company have access to, and besides, it is not used for taxation processes. It explains how outside stakeholders do not get to know what is happening within the closed company doors because the format used is primarily for internal use only. Additionally, a contribution margin income statement puts more focus on the company’s expenses.
Nonetheless, of importance to always bear in mind is that it one of the most important tools a company would ever have and plays a significant role in the decision-making process. In case every company gets into business intending to make a profit.
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