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 contribution marginContribution MarginThe contribution margin is a metric that shows how much a company's net sales contribute to fixed expenses and net profit after covering the variable expenses. As a result, we deduct the total variable expenses from the net sales when computing the contribution.read more. 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
Variable Costing Income Statement

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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:-

Manufacturing costs-

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

Marketing and administrative expenses-

  • 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.

variable cost income statement format

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

Variable cost income statement example1

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

Variable cost income statement example1-1

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

Variable cost income statement example1-2

The variable cost of good available for saleCost Of Good Available For SaleThe cost of goods available for sale refers to the cost of total goods produced during the year after accounting for the cost of finished goods inventory at the beginning of the year and is available for sale to the end-users.read more

=Variable cost of manufacture goods + Opening Inventory

Variable cost income statement example1-3

Calculate the closing inventory that is

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

Variable cost income statement example1-4

Now, we will get the Gross contribution margin

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

Variable cost income statement example1-5

Calculate variable marketing and administration expense which is

=Total sale*Variable Marketing and administrative expenses

Variable cost income statement example1-6

Contribution margin calculated i.e.

=Gross contribution margin – variable marketing and administration expenses

Variable cost income statement example1-7

Now, we have to calculate fixed expenses

= Fixed manufacturing expense cost + Fixed marketing and administrative expenses

Variable cost income statement example1-8

Finally, we will get net operating income

= Contribution margin – Fixed expenses

Variable cost income statement example1-9

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

Variable cost income statement example1-10

Manufacturing expenses per unit=Variable expense + Fixed Expense

Variable cost income statement example1-11

Hence, we found that net operating incomeNet Operating IncomeNet Operating Income (NOI) is a measure of profitability representing the amount earned from its core operations by deducting operating expenses from operating revenue. It excludes non-operating costs such as loss on sale of a capital asset, interest, tax expenses.read more with variable costing income principle.

Normal Income vs. Variable Costing Income Statement

  1. The Normal income statementNormal Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more 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.

Advantages

Disadvantages

Variable cost income statement help companies in various analyses like cost volume profit, to prepare flexible budgetsFlexible BudgetsA flexible budget refers to an estimate which varies with the change in production activity or volume. Such a budget is more realistic and flares the managerial efficiency and effectiveness as it sets a benchmark for the actual corporate performance.read more for better variance analysis and help in decision making to accept or reject special orders.

This has been a guide to Variable Costing Income Statement. Here we discuss steps to prepare the variable costing income statement along with practical examples and also its advantages and disadvantages. You may learn more about Accounting from the following articles –

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