Question

Distinguish between a contribution and a functional income statement. Write two paragraphs with examples of each in real situations.

Answer 1

Difference between Contribution and Functional Income Statement

• While a functional income statement works by separating product costs (those incurred in the process of manufacturing a product) from period costs (those incurred in the process of selling products, as opposed to making them), the contribution margin income statement separates variable costs from fixed costs.
• A functional income statement uses absorption or full costing, where both variable and fixed manufacturing costs are included when calculating the cost of goods sold. The contribution margin income statement, by contrast, uses variable costing, which means fixed manufacturing costs are assigned to overhead costs and therefore not included in product costs.

• Companies are generally required to present functional income statements for external reporting purposes. Contribution margin income statements, by contrast, are often presented to managers and stakeholders to analyze the performance of individual products or product categories. Companies can benefit from contribution margin income statements because they can provide more detail as to the costs and resources needed to produce a given product or unit of a product.