Different types of income statement formats may exist for a company to determine its profits and losses for a given time period. The contribution margin format income statement converts a traditional income statement format and replaces certain summary lines with contribution margin lines rather than a summary for profits. For example, this income statement type includes a gross contribution margin, contribution margin, and then the final operating income for the period. The contribution margin format income statement may work best for manufacturers. Otherwise, this statement is better used for internal purposes rather than outside use.
The biggest difference on the contribution margin format income statement is the separation of certain expenses. The first section, for example, has a line for sales and variable expenses. The difference between the two — sales revenue less variable expenses — results in the contribution margin that applies to the remaining expenses in the business. While the traditional contribution margin format income statement uses dollars for its values, a company can prepare one that uses percentages. The different look can help a company create a trend analysis for its financial statements.
In the second part of this statement, the section includes specific expenses of a company for a given period. These usually include the nonmanufacturing variable expenses that occur in the company. The difference between these expenses and the gross contribution margin results in contribution margin. The first two types of expenses are both variable costs because they can change with a company’s production output. This is perhaps the most essential piece of the contribution margin format income statement.
After the section that results in the company’s contribution margin, all other expenses go onto the income statement. The two cost categories for this section typically include the fixed manufacturing costs and nonmanufacturing expenses. Fixed manufacturing costs include any that do not change regardless of production output. For example, a company can produce zero to infinity in terms of products; the fixed costs do not change at any level of these production points. All manufacturing companies have some type of fixed costs here on the contribution margin format income statement.
The last inclusion on this income statement is the nonmanufacturing expenses. Another name for these expenses may be general, selling, and administrative expenses. A company can compute its net operating income by subtracting both fixed manufacturing and nonmanufacturing expenses from the contribution margin. The bottom line is the operating income for a given period.