The contribution income statement is an instrument that demonstrates whether a business has generated some revenue over a particular period of time. In other words, contribution income statements are used to measure the performance of a company by dealing with variable and fixed expenses.
Explanation:
To begin with, one should understand what variable and fixed costs or expenses are. Fixed expenses stand for the money that a company pays irrespective of production volumes. For example, it refers to building rate, equipment rate, and others. At the same time, variable costs represent the expenses that are not consistent all the time. Depending on production volumes, a business can witness different variable expenses as to wages, utility service payments, and more.
Thus, it is possible to subtract variable costs from sales to find a contribution margin. In addition to that, the net profit of a business can be identified by subtracting fixed costs from the margin. As for the standard contribution income statement format, it looks like a part of a balance sheet.
According to the information above, it can be interesting whether there are any differences between the contribution income statement and the traditional income statement. While the two are used to identify the profit of a company over a particular period, they utilize different approaches for this. When the contribution income statement relies on fixed and variable expenses, a traditional one deals with product and period costs.
Finally, it is necessary to comment on the pros and cons of the contribution income statement. The main advantage refers to the fact that it is a simple and straightforward tool to analyze the performance of a business. However, the principal disadvantage is represented by the fact that internal persons can only use this tool.
