For managerial accounting accounting purpose, it is very useful to recast the normal income statement into a contribution margin format. So what is the difference between the normal gross margin format and the contribution margin format.
The difference is self-explanatory -refer to the formula:
Gross margin = Revenues – Cost of Sales
whereas:
Contribution margin = Revenues – Total Variable Cost
Simple illustration of the contribution margin format:
Revenues $500,000
Variable costs 50,000
Contribution margin 450,000
Fixed costs 30,000
Operating Income $420,000
The advantage of the contribution margin format is to provide data for break-even point calculations and cost volume-profit analysis.
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