Question

Describe the format of an income statement prepared using the contribution margin approach.

Answer 1

Income statement prepared on the basis of contribution Margin Approach means in it all variable expenses are deducted from sales to derive contribution figure and from it fixed expenses are deducted to get the figure of net profit or loss. Here all expenses are classified on the basis of nature of expenses. From this form of income statement any layman can also get the idea of how much profit is available to cover the fixed cost. Also we can get the idea of how much fixed and variable expenses are incurred for any products or services which help to control the expenses. In normal profit and loss account we will get gross margin which is derived after considering the fixed and variable expenses while here we get contribution margin.
It breaks down the expenses into fixed and variable expenses instead of cost of goods sold, operating expenses , salary and finance cost. On the basis of contribution margin management can take decision to manufacture the additional units , to buy or not the products and such other decision in business
The format of Contribution margin income statement :
Particular	Amount
(A) Sales	xxx
Less : Variable cost
Direct material cost	xxx
Direct labour cost	xxx
Variable selling and admin. Expenses	xxx
Other variable cost	xxx
Total cost (B)	xxx
Contribution margin (A- B )	xxx
C. Less Fixed cost	xxx
Net profit or loss	xxx