What is a Contribution Margin Income Statement?

The traditional income statement format used for external financial reporting simply breaks costs down by functional area: cost of goods sold and selling and administrative costs.  

It does not show fixed and variable costs. 

Another income statement format, called the contribution margin income statement, shows the fixed and variable components of cost information. 

Note that operating profit is the same in both statements, but the organization of data differs. 

The contribution margin income statement organizes the data in a way that makes it easier for management to assess how changes in production and sales will affect operating profit. 

The contribution margin represents sales revenue left over after deducting variable costs from sales. 

It is the amount remaining that will contribute to covering fixed costs and to operating profit (hence, the name contribution margin).

The contribution margin income statement clearly indicates which costs are variable and which are fixed. 

Recall that the variable cost per unit remains constant, and variable costs in total change in proportion to changes in activity. 

Total variable costs are calculated by multiplying units by the cost per unit (per unit for cost of goods sold, and per unit for selling and administrative costs). 

Thus you end up with total variable cost of goods sold, and total variable selling and administrative costs. 

These two amounts are combined to calculate total variable costs.

The contribution margin represents the sales revenue left over after deducting variable costs from sales.

It is the amount remaining that will contribute to covering fixed costs and to operating profit.

Recall that total fixed costs remain constant regardless of the level of activity. 

Total fixed costs are deducted from the contribution margin to calculate operating profit.

Related Topics

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• Assign Direct Material and Direct Labor to Job
• Assign Manufacturing Overhead Costs to Job
• Assign Overhead Costs to Products
• Plantwide Cost Allocation
• Department Cost Allocation
• Activity-Based Costing
• Weighted-Average Cost of Products
• Production Cost Report
• Fixed, Variable, and Mixed Cost Estimations
• Contribution Margin Income Statement
• Cost-Volume-Profit Analysis
• Margin of Safety
• Contribution Margin per Unit of Constraint
• Absorption Costing vs Variable Costing
• Differential Analysis and Decisions
• Cost Decisions for Joint Products
• Capital Budgeting
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• The Master Budget
• Activity-Based Budgeting
• Standard Costs
• Imputed Value
• Variance Analysis for Product Costs
• Absorption Pricing
• Price Variance
• Absorption Variance 
• Responsibility Centers
• Comparing Segmented Income
• Using ROI to Evaluate Performance
• Using Residual Income to Evaluate Performance
• Use Economic Value Added to Evaluate Performance
• Transfer Pricing