Contribution Format Income Statement

Basically contribution format income statement helps to identify the net-working income in terms of variable and fixed costs. It enables the managers to make good financial decisions, planning, and control the organizational affairs effectively. Basically it divides cost into two classifications as fixed and variable expenses. The fixed costs are the expenses that do not change with time and are recurring like salaries, costs of goods and services, rents, overhead etc and the variable costs are those that vary with time and are non-recurring like lease payments, rent income, travel expenses etc.

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Letter of intent from contribution format income statement , source:en.wikipedia.org

Under contribution format income statement the term sunk cost refers to any cost that is incurred before the opportunity for recovery is available. Basically it refers to the cost of deciding on a course of action after the opportunity is lost. For example, if a company wants to invest in a new venture it should first identify the sunk cost and then use it to estimate the profit to be earned through that venture.

Net Operating Income (NOI) is the income statement form that shows the net operating income earned through the operations of the business. The word ‘net’ in the term indicates that the total revenue earned is less than the expenses incurred in the operations of the company during a period of one year. The companies normally use one of two forms of contribution format income statement; one is the gross revenue statement and the other is the net income statement. Generally a company uses the gross revenue statement form to show the basic nature of its business operations and the deductions made against it for tax purposes. A net income statement provides a more detailed analysis and hence provides more accurate results.

Frontiers from contribution format income statement , source:frontiersin.org

Under contribution format income statement an important feature of the document is the statement of performance based on variable costs. Variable cost refers to the expenses that are incurred by the company for variable assets or for capital assets such as machinery, vehicles etc. The company uses the term fixed cost for its fixed assets such as plant, buildings etc. These two terms mean that the revenue generated from sales of the product does not exceed the cost of production. In case of fixed costs, the term benefit is used here which means that the revenue from sales of a particular product will exceed the cost of production.

Under contribution format income statement the term selling price is used here, which means the selling price of a particular product divided by the selling inventory or the current supply. The term inventory or supply is used here to indicate the quantity of stock that is owned by the seller. Usually the seller provides the source of stock. The gross profit is shown here as the product price divided by the selling price. Under this type of income statement an important aspect is calculating the effect of increases in prices on sales.

Interest and Expense on the In e Statement from contribution format income statement , source:thebalance.com

The contribution form is one of the two documents that are usually presented along with the customary format income statements. It has to be prepared after preparing the other traditional format document called the profit and loss account. The contribution form has to be prepared before the sale of the goods or services and hence it has to contain certain fields that will be required for the calculation of the tax payable on income. Other fields are the cost of goods sold, the administrative expenses incurred during the production of the goods sold etc.

One thing that needs to be mentioned here is that a contribution format income statement for the next quarter needs to contain a schedule that will be used to calculate the tax payable. The amount of tax payable is determined by using the schedule to identify the selling price as well as the variable expenses. In addition to this, another field that is also important is the identification of the tax units. This refers to the prices that are used here to determine the taxes payable.

Pro forma Financial Statement Template Picture Year End Statement from contribution format income statement , source:roflsaurus.com

The contribution approach is used to calculate the pre-tax income statement as well as the post-tax income statements. The major advantage of the contribution format approach is that it is simple and easy to understand. The main disadvantage is that it does not give a clear picture of how much of the sales was able to result in profit rather than just how much was generated through the variable costs. On the other hand the fixed costs approach makes the calculation of the taxes payable very simple as all the information is right at hand and there is no need for a report on the variable costs or an opportunity cost. Hence both of these formats are very popular for generating income statements for the year ended 31 December.