Budgeting Basics and Beyond

4.2. Contribution Margin Income Statement

The traditional income statement for external reporting shows the functional classification of costs, that is, manufacturing costs versus nonmanufacturing expenses (or operating expenses). An alternative format of income statement, known as the contribution margin income statement, organizes the costs by behavior rather than by function. It shows the relationship of variable costs and fixed costs a given cost item is associated with, regardless of the functions.

The contribution approach to income determination provides data that are useful for managerial planning and decision making. The statement highlights the concept of contribution margin, which is the difference between sales and variable costs. The traditional format emphasizes the concept of gross margin, which is the difference between sales and cost of goods sold.

These two concepts are independent and have nothing to do with each other. Gross margin is available to cover nonmanufacturing expenses, whereas contribution margin is available to cover fixed costs. A comparison is made between the traditional format and the contribution format below.

Traditional Format			Contribution Format
Sales		$15,000	Sales		$15,000
Less: Cost of Goods Sold		7,000	Less: Variable Expenses
Gross Margin		$8,000	Manufacturing	$4,000
Less: Operating Expenses			Selling	1,600
Selling	$2,100		Administrative	500	6,100
Administrative	1,500	3,600	Contribution Margin		$8,900
Net Income		$4,400	Less: Fixed Expenses
			Manufacturing ...