Contribution Margin Approach Income Statement

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.

Contribution margin approach income statement. The contribution margin income statement is a very useful tool in planning and decision making. 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. Fixed expenses are then subtracted to arrive at the net profit or loss for the period. Calculating your contribution margin the first step in creating your contribution margin income statement is to calculate the contribution margin.

While it cannot be used for gaap financial statements it is often used by managers internally. The contribution margin income statement separates expenses by behavior emphasizing the distinction between expenses that change when the level of activity changes and those that are unaffected by it. The contribution margin approach to calculate the break even point i e. Contribution margin is the difference between sales and variable costs.

The contribution margin income statement is used for analysis and decision making. A contribution margin income statement on the other hand is a purely management oriented format of presenting revenues and expenses that helps in various revenues and expense related decision making processes. The contribution margin income statement is a cost behavior statement. The traditional income statement separates expenses by function emphasizing the distinction between production and administrative and selling expenses.

In a contribution margin income statement variable selling and administrative periods costs are grouped with variable product costs to arrive at the contribution margin. Contribution margin income statements refer to the statement which shows the amount of contribution arrived after deducting all the expenses that are variable in nature from the total revenue amount and further fixed expenses are deducted from the contribution to get the net profit loss of the business entity.