Question

What is the difference between a contribution income statement and a traditional income statement? Under what circumstances would a firm use each?

Answer 1

Hi,

Please find my answer as below:

Traditional income statement

It is known as a profit and loss statement. It shows a picture whether company is profitable or not in any accounting period. It also reflects a summary of various source of revenues and incurs expenses through both operating and non-operating activities.

Contribution margin income statement
Contribution margin income statement shows a company's variable expenses are deducted from sales to arrive at a contribution margin. A contribution margin is getting by a company's revenues minus its variable expenses, and it reflects company's revenues are contributing to its fixed costs and net income. Once a contribution margin is determined for any business, a company can subtract all applicable fixed costs to arrive at a net profit or loss for the accounting period in question.

Differences

In traditional income statement product costs are separated (which incurs while manufacturing any product) from period costs (it incurs in the process of selling products, as opposed to making them). In contribution margin income statement variable costs are separates from fixed costs.

A traditional income statement uses absorption or full costing, where cost of goods sold calculated by including both variable and fixed manufacturing costs. In other side, in 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.

Traditional income statements are presented for the external reporting purposes while contribution margin income statements are presented to managers and stakeholders to analyze the performance of individual products or product categories.

Circumstances firm use each statement below:

A traditional income statement uses to show absorption or full costing, where variable and fixed manufacturing costs are included when calculating the cost of goods sold. Companies are generally required to present traditional income statements for external reporting purposes.

A contribution margin income statement uses to show variable expenses are deducted from sales to arrive at a contribution margin. A contribution margin is essentially a company's revenues minus its variable expenses, and it shows how much of a company's revenues are contributing to its fixed costs and net income. Companies are generally required to present contribution margin income statement for internal reporting purposes.

Hope this helps :)