# Variable Costing Income Statement

## What is Variable Costing Income Statement?

The variable costing income statement is one where all variable expenses are subtracted from revenue, which results in . From this, all fixed expenses are then subtracted to arrive at the net profit or loss for the period. It is useful to determine the proportion of expenses that actually varies directly with revenues.

In many businesses, the contribution margin will be substantially higher than the gross margin, because such a large amount of its production costs are fixed, and a few of its selling and administrative expenses are variable.

The formula for Net profit or loss is:-

• Contribution Margin =Revenue – Variable Production Expenses – Variable Selling and administrative expenses
• Net profit or Loss = Contribution Margin – Fixed production expenses – Fixed Selling and administrative expenses

For eg:
Source: Variable Costing Income Statement (wallstreetmojo.com)

### Examples of Variable Costing Income Statement

#### Example #1

A company named ABC Cotton sells cotton \$30 per Kg. The data for the year 2016 is given below:-

• Sales in Kg- 80,000 kgs
• Finished goods inventory at the beginning of the period- 15,000 kgs
• at the closing of the period-20,000 kgs

Manufacturing costs-

• Variable costs- \$10 per Kg
• Fixed manufacturing expense cost- \$ 3,00,000 per year

• Variable expenses- \$5 per kg of sale
• Fixed expense- \$2,50,000 per year

Through the above information, we have prepared a variable cost income statement.

#### Example #2

Let us understand how this statement is prepared

Sales are calculated, which is a total sale in kgs, i.e., 80000 multiply by per kg cost, i.e., \$30.

=Total Sale*Rate per kg

Calculate variable Opening Inventory

Opening Inventory that is finished goods inventory at the beginning of the period, i.e., 15000 kgs multiplies by manufacturing variable cost, i.e., \$ 10. So,

= finished goods inventory at the beginning of the period* manufacturing variable cost

The variable cost of manufactured goods is

=(Total sale + Finished goods inventory at the closing of the period – Finished goods inventory at the beginning of the period)*manufacturing variable cost

The variable

=Variable cost of manufacture goods + Opening Inventory

Calculate the closing inventory that is

=Finished goods inventory at the closing of the period* manufacturing variable cost

Now, we will get the Gross contribution margin

Gross contribution margin = Total Sales – Variable cost of goods available for sales –

Calculate variable marketing and administration expense which is

=Total sale*Variable Marketing and administrative expenses

Contribution margin calculated i.e.

=Gross contribution margin – variable marketing and administration expenses

Now, we have to calculate fixed expenses

= Fixed manufacturing expense cost + Fixed marketing and administrative expenses

Finally, we will get net operating income

= Contribution margin – Fixed expenses

Total Production during year = Total sales + Closing inventory – Opening Inventory

Manufacturing expenses per unit=Variable expense + Fixed Expense

### Normal Income vs. Variable Costing Income Statement

1. The has a gross margin, whereas variable costing income statements have a contribution margin.
2. In variable costing income statements, all variable selling and administrative expenses group with variable production cost. It is a part of the contribution margin.
3. All fixed production costs aggregate lower in a statement, after the contribution margin in variable costing income statements.

The key difference between gross margin and contribution margin is that in gross margin, fixed production costs include in the cost of goods. Whereas in contribution margin, fixed production costs do not include in the same calculation. This means that variable costing income statements is sorted based on the variability of the underlying cost information, rather than by functional areas or expenses categories that are found in a typical income statement.

Under both statements, the net profit or loss will be the same.

• Variable cost provides a better understanding of the effect of fixed costs on the net profit in variable cost income statements.
• Through variable cost income statements, companies get the necessary income for . Management cannot extract this data from traditional methods.
• The net operating income figure is close to the flow of cash. It is useful for business, which faces problems in .
• Other method changes with a change in inventory level, period, etc. Sometimes sales and income move in the opposite direction, but this does not happen in the variable cost method.