Question

Give a numerical example for Variable Costing Contribution Format Income Statement that is used for the internal decision-making and compare with the traditional income statement prepared by absorption costing that is used for the external reporting. Prepare the two income statements assuming the following

1- There is no inventory.

2- There is beginning inventory.

3- There is end of period inventory

4- Explain and comment on the reasons for differences in the results

Answer 1

vARIABLE COSTING CONTRIBUTION FORMAT INCOME STATEMENT

Revenues		1000
less
Variable production expenses (such as materials, supplies, and variable overhead)		500
Variable selling and administrative expenses		200
Contribution margin		300
less
Fixed production expenses (including most overhead)		100
Fixed selling and administrative expenses		100
Net profit or loss		100

TRADITIONAL INCOME STATEMENT

Revenue	1000
less
cost of goods sold	500
Gross Profit	500
Less
Selling & Adminsitration	200
Operating Income	300

IN TRADITIONAL FIXED EXPENSES ARE NOT ACCOUNTED AND IN VARIABLE WE CAN SEE CONTRIBUTION MARGIN AS WELL AS NET PROFIT OR LOSS FROM FIXED EXPENSES WHICH GIVES BETTER PICTURE.

Variable income statement separated Variable expenses from Fixed expenses whereas same is no segregated in traditional.