Basic Financial Statement

FUNCTIONAL AND CONTRIBUTION MARGIN INCOME STATEMENTS

Up until now, we have been using the functional, or traditional, income statement format that you learned in financial accounting. But managers are better aided in their decision making by a contribution margin income statement.

A traditional, functional income statement is required for external financial statements. It separates costs by their function: product costs or period costs. Product costs (COGS) are subtracted from sales to show gross margin (gross profit). All period costs (selling, general, and administrative) are then subtracted to show operating income.

          Sales
          Less Cost of goods sold (including DM, DL, VOH, and FOH)
          Gross margin
          Less operating expenses
          Variable selling, general, and administrative expenses
          Fixed selling, general, and administrative expenses
          Net operating income

The contribution margin income statement is preferable for management purposes. It separates costs by their behavior: variable costs and fixed costs. It also works very well with CVP analysis. All variable costs, both product and period, are subtracted from sales to show contribution margin. All fixed costs, both fixed overhead (a product cost) and fixed period costs, are then subtracted to show operating income. Fixed overhead is subtracted in total regardless of how many are produced or sold.

      Sales
      Less variable costs
      Variable cost of goods sold (including DM, DL, and VOH)
      Variable selling, general, and administrative expenses
      Contribution margin
      Less fixed costs
      Fixed overhead
      Fixed selling, general, and administrative expenses
      Net operating income

We’ll use the following data for some examples:
|Production                                     |60,000 units                         |Assume no beg. inv.                           |
|Sales...