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Kwami Kwami
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6 years ago
What are the differences between a financial income statement and a contribution margin income statement? Why is the contribution margin income statement useful to management?
Textbook 
Survey of Accounting: Making Sense of Business

Survey of Accounting: Making Sense of Business


Edition: 1st
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mourningbirdmourningbird
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 A financial income statement generally presents revenues less cost of goods sold (product costs) to get gross profit then less selling and administrative expenses (period costs) to get net profit whereas a contribution margin income statement classifies the costs by their behaviorfixed and variable. The presentation would be revenues minus all variable costs to get contribution margin then less all fixed costs to get net profit.

The contribution margin income statement is useful because it allows management to see exactly how the costs behave. Management sets the price of a product based on how much it costs to make that product. Variable costs are a direct result of the number of units produced. Theoretically, if no units were produced a variable cost would not be incurred. A fixed cost is incurred whether there is production or not for a period of time. So management needs to be aware of how much money is left over to cover fixed costs. It is always a possibility that the price per unit may need to be increased or variable costs decreased to cover the fixed expenses. Then management always needs to find ways of cutting fixed costs.         
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6 years ago
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