Contribution Margin
Absorption Income versus Variable Costing (Contribution Margin)
It is hard enough to learn one method of preparing an income statement. Nevertheless, managerial accountants often find that the traditional income statement (absorption income or income statement prepared in accordance with US GAAP) does not meet their needs. Internally, the organization needs an income statement that is helpful in analyzing individual products and services or groups of products and services. This information is then used in the decision-making process.
Contribution Margin
There is no one format required for an internal income statement other than it should be useful to an
organization. Some variation of a behavioral income statement is often favored since it is useful for planning. In this type of income statement, costs are categorized according to behavior (variable and fixed) rather than by function (cost of goods sold and operating expenses). Preparing a behavioral income statement is commonly referred to as using a variable costing or contribution margin approach. Variable costing is not just a formal approach to preparing an income statement, but a way of thinking. It is useful for coming up with estimates in “what-if” scenarios.http://usresearchwriters.com
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