The contribution margin income statement is the method to calculate the net profit/loss by deducting the variable expenses from the total sales and then all the fixed expenses are subtracted from the contribution margin obtained.
An income statement exhibits the company’s revenue, costs, gross profits, selling and other expenses, income, taxes paid, and the profit/loss in a systematic order.
This contribution income statement format is a great example that excludes the variable expenses and fixed expenses involved in a business. It has a fixed expense as an overhead cost, even if the sales volume goes up or down but the fixed expenses always incur.
Further, we will discuss the format for preparing the contribution margin, its advantages and disadvantages, and some examples.
What is an Income Statement?
Also known as a profit/loss statement is an important financial statement that is prepared to get the company’s financial performance over a specific accounting period.
Purpose of preparing a Contribution Margin Income Statement:
- It organizes the data more easily
- Makes it easier for the management to evaluate the data and examine the changes in production and sales and how these changes will influence the operating profit.
- It helps the management to know the total sales revenue after deducting the variable cost and the fixed costs.
Difference between a Traditional and a Contribution Income Statement
- The traditional income statement separates the product costs from the period costs that occurred during the selling of a product; whereas the contribution income statement separates the variable cost from the fixed cost.
- The former uses absorption or full costing for the calculation of the costs of goods sold but the latter uses variable costing.
- The former is prepared for external reporting purposes; whereas the latter is prepared for the internal audience such as managers and stakeholders to analyze the individual product performance.
- The former does not provide detailed data but the latter provides detailed data.
Advantages of this income statement
- Data is placed in an organized and easier manner.
- Helps the management to understand how the changes in the production and sales will influence or affect the profit.
- It helps in identifying the variable expenses.
- Preferable analysis can be done as the fixed and variable expenses are excluded.
- It can also be used for break-even analysis.
- It helps in the decision-making.
Disadvantages of this income statement
- The contribution income statement is not recognized by the GAAP (Generally Accepted Accounting Principles).
- It cannot be shared by the exterior clients/consumers.
- Its center of attention is only on the expenses.
- It is only approachable to the internal audience.
Format of the Contribution Income Statement
|
Sl. No. |
Particulars |
Amount (Rs.) |
|
|
|
|
|
1. |
Sales |
______ |
|
2. |
(Less) Variable Expenses (supplies, variable overhead, etc.) |
______ |
|
3. |
(Less) Variable selling and administrative expenses |
______ |
|
4. |
Total Contribution Margin |
______ |
|
5. |
(Less) Fixed Production expenses |
______ |
|
6. |
(less) Fixed selling expenses |
______ |
|
7. |
Total net profit or loss |
______ |
➡LEARN MORE: How do Non-Disclosure Agreements work?
Examples to know how to fill the format and calculate
Example 1.
Ram & Sons sold their product for ₹ 2,000 per unit. The fixed production costs were ₹3,000, and fixed selling and administrative costs were ₹50,000. Variable production costs were ₹1,000 per unit, and variable selling and administrative costs were ₹500 per unit. Ram & Sons sold ₹500 units for the previous month.
Prepare a Contribution Margin Income Statement.
Solution:
Ram & Sons
Contribution Margin Income statement for the year ending 31st Mar. 20XX.
|
Particulars |
Amount (in ₹ ) |
Amount (in ₹) |
|
|
|
|
|
Sales |
|
1,000,000 |
|
(Less) Variable expenses: |
|
|
|
Cost of goods sold |
(500,000) |
|
|
Selling and administrative costs |
(250,000) |
|
|
Total variable expenses |
|
(750,000) |
|
Contribution Margin |
|
250,000 |
|
|
|
|
|
(less) Fixed costs: |
|
|
|
Costs of goods sold |
(3,000) |
|
|
Selling and administrative costs |
(50,000) |
|
|
Total fixed costs |
|
(53,000) |
|
Net Profit: |
|
197,000 |
Calculation:
Sales = ₹(2,000 x 500) = ₹1,000,000.
Costs of goods sold= Rs. 1000* No. of units sold
Rs. 1000*500= ₹500,000
Selling and administrative costs= Rs. 500* Rs. 500 = ₹250,000
Contribution Margin Ratio:
= ₹ (250,000/1,000,000)*100
= 25%.
Variable cost Margin Ratio:
= ₹ (750,000/1,000,000)*100
= 75%.
Example 2.
The ABC Company sold product per unit at ₹30. No. of total units manufactured and sold during the month is 2,000. Its variable manufacturing cost per unit is ₹12.
Additional info:
- Variable selling and administrative cost per unit: ₹4
- Fixed manufacturing cost per month: ₹6,000
- Fixed marketing and administrative cost per month: ₹2,000.
Prepare the contribution margin income statement.
Solution:
|
Particulars |
Amount (₹) |
|
|
|
|
Sales (2000*30) |
60,000 |
|
(Less) Variable costs of the goods sold (2000*12) |
(24,000) |
|
(less) Sales and administrative expenses (2000*4) |
(8,000) |
|
Contribution Margin |
28,000 |
|
(Less) Fixed expenses |
|
|
Manufacturing |
(6,000) |
|
Marketing and Administrative |
(2,000) |
|
|
|
|
Net Profit |
20,000 |