Contribution Format Income Statement

What is a Contribution Format Income Statement?

The Contribution Format Income Statement, also known as the variable costing income statement, is a financial report that separates costs into fixed and variable costs. Unlike the traditional income statement that categorizes costs as either cost of goods sold or operating expenses, the contribution format statement focuses on identifying costs that vary directly with sales levels. This helps in calculating the “contribution margin,” which is the revenue remaining after variable costs that can contribute to fixed costs and profit.

How Is It Prepared?

To prepare a Contribution Format Income Statement, you need to:

Separate variable costs from fixed costs.
Calculate the total variable costs.
Subtract the total variable costs from total sales to find the contribution margin.
Subtract the fixed costs from the contribution margin to get the net income.

Structure

The basic structure is as follows:

Sales Revenue
Less: Variable Costs
- Variable Cost of Goods Sold
- Variable Selling Expenses
- Variable Administrative Expenses
Contribution Margin
Less: Fixed Costs
- Fixed Selling Expenses
- Fixed Administrative Expenses
Net Income

Why Is It Important?

Decision Making: Helps in making various short-term decisions like pricing, product mix, and whether to discontinue a product.
Performance Evaluation: Assists in evaluating the performance of cost, profit, and investment centers.
Planning: Useful for budgeting and forecasting.
Cost Control: Aids in identifying areas where costs can be controlled.

How Is It Used in Practice?

In practice, managers use the Contribution Format Income Statement for internal reporting and decision-making rather than for external financial reporting. It’s often used for:

Break-even analysis
Profit planning
Performance evaluation
Special decision-making scenarios (e.g., whether to accept a special order)

Example in Table Format

Items	Amount ($)
Sales Revenue	100,000
Less: Variable Costs
– Variable COGS	40,000
– Variable Selling Expenses	10,000
– Variable Admin Expenses	5,000
Total Variable Costs	55,000
Contribution Margin	45,000
Less: Fixed Costs
– Fixed Selling Expenses	15,000
– Fixed Admin Expenses	10,000
Total Fixed Costs	25,000
Net Income	20,000

In this example, the Contribution Margin ($45,000) is the amount available to cover the fixed costs and to contribute to the net income. The Net Income is found by subtracting the total fixed costs from the contribution margin.

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