Managerial Accounting E-Company Income Statement Contribution Margin

Managerial Accounting

E-Company

Income Statement

Contribution Margin

For Period Ended Dec 31, 20XX

Revenue

less V Mfg Cost

less V Op/Selling Cost

Gross Profit (Contribution Margin)

Fixed Mfg Overhead

Fixed S&A Exp

Total Fixed Costs

Net Income

$4,765,000

E-Company Income Statement

Absorption Method

For Period ended Dec 31, 20XX

Revenue

Less Mfg Cost

Less Op/Selling Cost

Less S&A Exp

Net Income

$5,485,500

The gross profit margin is 75.6%. This is calculated as the (revenue -- cogs) / revenue (Investopedia, 2011). The contribution margin is similar, but does not include costs associated with goods still sitting in inventory. It would be more easily calculated as (29 -- 1.2 -- 4.9) / 29 = 78.9%.

The net margin should be calculated on the basis of the GAAP income statement, so in that case it would be $4,765 / $10,005 = 47.6%. If the net margin was calculated on the basis of the absorption income statement, the net margin would be (5485.5 / 10005) = 54.8%.

There are a few points of difference between the two methods that result in the different net income figures. The first point of difference is with respect to what is included in the income statement. Under the absorption approach, only the costs associated with the 345,000 units sold would be included. The costs associated with the 45,000 units still in inventory will be included when those units are sold. With the variable approach, the full costs for the year are included. The result is that under the absorption method, when the production is higher than the sales, the absorption method will result in a higher net income (Heier, no date).

This is also true for the fixed costs. In absorption costing, the fixed costs are allocated by sales, so they are lower than under variable costs. In addition, the absorption method does not differentiate between fixed and variable costs. So under "manufacturing cost" are costs that in the variable method would be listed as "variable" and "fixed."

If the company sold an addition 10,000 units, this would have an impact on revenue for both sides, but it would only change the costs on the absorption side, since the cost associated with producing those goods has already been included under the variable costing method. The income statements would look as follows:

E-Company

Income Statement

Contribution Margin

For Period Ended Dec 31, 20XX

Revenue

10295000

less V Mfg Cost

1960000

less V Op/Selling Cost

480000

Gross Profit (Contribution Margin)

7855000

Fixed Mfg Overhead

1600000

Fixed S&A Exp

1200000

Total Fixed Costs

2800000

Net Income

$5,055,000

E-Company Income Statement

Absorption Method

For Period ended Dec 31, 20XX

Revenue

10295000

Less Mfg Cost

3159500

Less Op/Selling Cost

426000

Less S&A Exp

1065000

Net Income

$5,644,500

I would recommend that the CFO use multiple costing methods if possible. Obviously, keeping track of things using GAAP is important, but the use of absorption costing has value as well. These methods essentially provide two different types of information, both of which are useful. Absorption costing in particular focuses on the costs associated with producing a unit of good, and in that respect it provides better information because there is no mismatch between the costs in a period and the revenues -- both are based on the same number of units. While the net income will be the same between the two methods in the long run, the absorption method provides better short-run information.