The contribution margin income statement is a very useful tool in planning and decision making. While it cannot be used for GAAP financial statements, it is often used by managers internally.

The contribution margin income statement is a cost behavior statement. Rather than separating product costs from period costs, like the traditional income statement, this statement separates variable costs from fixed costs.

The basic format of the statement is as follows:

CMIS1

Variable costs, no matter if they are product or period costs appear at the top of the statement. Fixed costs are treated the same way at the bottom of the statement. It is helpful to calculate the variable product cost before starting, especially if you will need to calculate ending inventory.

Let’s run through an example to see how the income statement is constructed. We will use the same figures from the absorption and variable product cost post.

AB1

The first thing to remember about any income statement is that the statement is calculated based on the amount of product sold, not the amount of product produced. Therefore, this income statement will be based off the sale of 8,000 units.

To calculate sales, take the price of the product and multiply by the number of units sold.

Sales = Price X Number of units sold

Sales = $100 X 8,000

Sales = $800,000

CMIS2

Next, we need to calculate the variable costs. In the absorption and variable costing post, we calculated the variable product cost per unit.

AB3

This covers the product costs, but remember we must include all the variable costs. There is also $5 of variable selling cost that should be included. Multiply the total variable cost per unit by the number of units sold.

Total variable cost = Variable cost per unit X Number of units sold

Total variable cost = ($44 + $5) X 8,000

Total Variable Cost = $392,000

CMIS3

 Contribution margin is the amount of sales left over to contribute to fixed cost and profit. Contribution margin can be expressed in a number of different ways, including per unit and as a percentage of sales (called the contribution margin ratio). In the contribution margin income statement, we calculate total contribution margin by subtracting variable costs from sales.

Total contribution margin = Sales – Variable costs

 CMIS4

Fixed costs include all fixed costs, whether they are product costs (overhead) or period costs (selling and administrative). One thing that causes the contribution margin income statement and variable costing to differ from the traditional income statement and absorption costing is the fact that fixed overhead is treated as if it were a period cost. All fixed overhead is expensed in the period it is incurred. Under absorption costing, fixed overhead is attached to each unit. Therefore if there are units that are not sold, a portion of the fixed overhead ends up in inventory. That is not the case when using variable costing.

Add fixed overhead and fixed selling and administrative to calculate total fixed cost.

Total fixed cost = Fixed overhead + Fixed selling and administrative

Total fixed overhead = $48,000 + $112,000

Total fixed overhead = $160,000

CMIS5

Last step: subtract fixed costs from contribution margin to calculate operating income.

CMIS6

Final Thoughts

The contribution margin income statement is all about behavior. Remember the format and ignore the traditional (absorption) income statement. Most students that have trouble with this statement try to relate it back to what is happening on the traditional income statement. Throw out what you know about the traditional income statement when doing the contribution margin income statement. Focus on the format of this statement and you should be fine.

Related Video

The contribution margin income statement

Share This:


Related pages


double declining depreciation exampledouble declining formulacalculate closing inventorydefine prepaid insurancecash register reconciliationcalculating social security and medicare taxesallowance method for accounting for bad debtswhat is the annuity factorhow to calculate employer payroll taxeshow is simple interest calculated on a loanunearned expensesbad debts entrieshour calculator payrolljournalizing transactions in accounting examplesfactory overhead cost examplesfifo accountingwrite off of uncollectible accountsdell boeing discountwhat inventory system does walmart usetarget costing formulaasset turnover equationuncollectible accountmanagerial accounting study guidesales cogsbond discount calculatorfederal withholding taxannuity present valuep&l statement for dummiesunearned revenue in income statementreturn on investment measureshow to find total fixed cost formulawhat is a predetermined overhead ratethe normal balance of a capital accountcalculate the variable cost per unitoverhead cost examplesrevenue recognition formulaaccruals accounting entrieswhat is cogs accountingperpetual inventory record examplesimple interest calculator monthlypresent value of an ordinary annuity tabledouble declining balance method exampletrade receivables formulapresent value of ordinary annuitycontribution margin per unit calculatorassets liabilities capital equationinterest equals prtwhat is contributed equityis allowance for doubtful accounts an assetadjusting entry for depreciation expensehow to find total manufacturing overhead costgross profit calculation examplejournal entry for invoicejournal entry for income tax refundaccrual accounting entrieshow to calculate closing inventory accountinghow to compute bad debt expenseavoidable cost definitionreturn on controllable assetspayroll deductions payablemanufacturing overhead costs includereceived cash for services performed journal entryis labor a variable costaging of receivableshow to calculate desired ending inventorycollected accounts receivableprepaid expenses examplehow to calculate direct materials inventoryjournal entry accounts receivablepresent value of a lump sum calculatoradjusting entries and closing entrieswhat is unearned revenuenet income calculator floridasales accrual journal entrymerchandise accounting definitionwhat is an example of a variable expenseincome statement gaapcommon stockholders rightscompanies using target costing