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Creating Contribution Margin Income Statements

Creating Contribution Margin Income Statements
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  • 0:47 How Do You Make One?
  • 1:57 Why Bother?
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

When a manager is trying to figure out quickly if variable costs are getting out of control, a contribution margin income statement can be very valuable. In this lesson, we learn about such statements.

Contribution Margin Income Statement

As you've probably gathered by now, companies treat variable costs, or those costs incurred for each unit of production, differently than fixed costs, or the costs of doing business that are more or less constant. In short, while fixed costs can be spread out, variable costs must be paid every period. Luckily, there is a statement that shows not only how much of total sales has been spent on variable costs, but also how much money is left after paying them. It also shows the total amount left after fixed costs are deducted. This statement is called the contribution margin income statement. In this lesson, we'll learn how to make one, why they are important, and what makes them different from a regular income statement.

How Do You Make One?

Making a contribution margin income statement is a very easy and straightforward process. First, we start with the total sales from the period. This is all the money that was made by the company from sales. From that we subtract the variable production expenses. This includes everything from the cost of raw materials to the cost of electricity to run the machines. From this, we then subtract the variable labor expenses, which are those wages we had to pay for production. Someone working on a machine would count towards this, but an accountant wouldn't. The resulting number is the contribution margin.

However, our form still isn't complete. From the contribution margin we subtract any fixed costs, ranging from the cost of the land to salaries of managers. Finally we subtract any other administrative costs. This is important to notice: the final number in the contribution margin income statement is not the contribution margin itself, as that occurs earlier in the document. Instead, it is the total profit. Obviously, if it is negative, it is a total loss.

Here is an extremely basic overview of what this might look like:

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