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Basic Financial Statement Essay

592 words - 3 pages

FUNCTIONAL AND CONTRIBUTION MARGIN INCOME STATEMENTS

Up until now, we have been using the functional, or traditional, income statement format that you learned in financial accounting. But managers are better aided in their decision making by a contribution margin income statement.

A traditional, functional income statement is required for external financial statements. It separates costs by their function: product costs or period costs. Product costs (COGS) are subtracted from sales to show gross margin (gross profit). All period costs (selling, general, and administrative) are then subtracted to show operating income.

Sales
Less Cost of goods sold (including ...view middle of the document...

inv. |
|Sales |60,000 units |$12/unit |
|Costs: | | |
|Direct material |$180,000 |$3 per unit produced |
|Direct labor |$120,000 |$2 per unit produced |
|Variable overhead |$ 60,000 |$1 per unit produced |
|Fixed overhead |$150,000 | |
|Variable selling/administrative |$ 60,000 |$1 per unit sold |
|Fixed selling/administrative |$ 30,000 | |

Since all the units produced were sold, our income statements are as follows:

|Functional Income Statement | | | |
|Sales (60,000 x $12) | | |$720,000 |
|Less COGS (product costs) | | | |
| Direct material (60,000 x $3) | |$180,000 | |
| Direct labor (60,000 x $2) | | 120,000 | |
| Variable overhead (60,000 x $1) | | 60,000 | |
| Fixed overhead* (60,000 x $2.50) | | 150,000 | 510,000 |
|Gross margin | | | 210,000 |
|Less operating expenses (period costs) | | | |
| Variable selling & administrative (60,000 x $1) | |$ 60,000 | |
| Fixed selling & administrative | ...

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