 Hello in this lecture. We're going to talk about the contribution margin income statement at the end of this support Accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by Category further broken out by course each course then organized in a logical Reasonable fashion making it much more easy to find what you need than can be done on a YouTube page We also include added resources such as excel practice problems PDF files and more Like QuickBooks backup files win applicable So once again click the link below for a free month membership to our website and all the content on it Yes, we will be able to create a contribution margin income statement from a trial balance create income statement from a trial balance a financial income statement compare and contrast the contribution margin income statement to a standard financial income statement and Calculate the contribution margin per unit Okay, so we're gonna have the trial balance over here on the left hand side We're gonna start off with a normal financial Income statement reason being is because we want to compare and contrast the two So I want to start off with what we know then move on to the new thing the contribution margin income statement on the left hand side We have a trial balance which has a very limited balance sheet portion Which only has the cash and the accounts payable and retained earnings everything else is related to the income statement So we have revenue on down all the expenses related to the income statement net income is 72 270 That's gonna be the revenue minus the expenses So we already know what the bottom line number of the income statement will be that's gonna be saying the same for the normal income Statements as well as the contribution margin income statements The thing that will differ is the categorization the normal income statement is going to categorize by by what the expenses for The contribution income statement is going to categorize by the type of expense the behavior of the expense variable versus fixed And there's different reasons for the two of those remember that the that the income statement financial side That's what's going to be due for generally accepted accounting principles That's what external users want to see in terms of the big picture when we think about Contribution margin income statement that we're usually think about internal use Managerial accounting internal use because it really helps to make projections and things like that Also note that I'm gonna basically have the expense for direct materials direct wages and like factory overhead type stuff So we're expensing it in real time as it as it happens and the assumption being that basically we're taking the job And and we're expensing it and selling it at the same time That's why these are going to be included in cost of goods sold Rather than we what we would kind of do in a job cost system Which is basically put into work and process then finished goods and then expense it when it's sold at a later time And the reason for that is because I want to group out what's in the cost to get sold by what's in there So that we can kind of see what's making up the cost to get sold Which is going to be the direct materials the wages and the in the overhead as compared to the contribution margin income statement Which isn't going to be grouping in the same way. So let's find a home for all these We're gonna say the revenue is a credit here. We're gonna put it on the statement It's just a positive number Then we're gonna calculate the cost of goods sold Normally it would be always calculated as begetting inventory plus purchases or in this case Cost of goods manufactured minus the ending inventory But here remember we expensed everything because we're kind of assuming that we did it at the same time meaning we Did the work and then sold it in the same time period and therefore we're gonna put the components of what makes up cost to get So remember cost gets sold is the inventory we're selling that is made up in one way or the other By the direct materials direct materials and direct late wages That's what's being put into the cost to get sold the inventory that we're selling Notice that those two are generally variable costs meaning they change in direct proportion to the number of stuff that we're producing And then we have the overhead which oftentimes is the fixed cost So note that the behavior of these two costs are gonna be different But we're grouping them not by behavior. We're grouping them by Category in this case the costs related to the inventory that we're selling now What would be grouped into something like overhead not sales commission? We would have the taxes on the factory anything that says factory on it So maintenance on the factory. So I'm gonna put a dot here. We got the depreciation on the factory lease a factory equipment So those are all types of things that would be included or could be included in the overhead So if we add those up, we'll bring the calculator over here and see if we can add those up We've got the 13 5 plus the 27,000 plus the 87,000 plus the 27,000 gives us the 154 5 so there's that 154 5 there and That will give us the Total cost of good soul. So here's the total cost of good sold once again We're just showing the components of it direct materials direct labor overhead. We're breaking this out by Category in this case cost of good sold that'll give us the gross profit The most important number on the financial statement is the comparison of the revenue to the costs of the stuff that we're selling That's usually the most important comparison. That's what the users of the financial statements really want to see We break out the other Expenses in terms of operating expenses, which would be selling it expenses and administrative selling expenses in this case Consists of sales commission and notice that sales commission is a variable cost because it's going to change with the number of stuff that we sell so it behaves more like direct materials and direct wages and And unlike kind of a lot of the stuff and overhead which is kind of fixed But we're breaking it up by category not by behavior of the cost. We have the rent on the office sales rent on office here we have Then the total selling expenses we add these two ups with a 95 7 plus 77,000 equals the 172 7 and then we're gonna have the administrative expenses administrative expenses will include the Administrative salaries so administrative salaries here that'll include the accounting in this case And then we have the rent on the administrative office, which is the 50 here Notice we found a home for everything on the income statement all the dark blue numbers except for the income tax That's usually be going to be calculated at the end because it's going to depend on the net income So that's going to give us the total of administrative We're breaking these out in this column now so that'll give us the total operating so total operating being broke out over here being this number plus this number and Then we can get the income before taxes, which is the 450 150 minus the 329 7 that'll give us the 120 450 again We often break out taxes at the end because we're going to calculate the taxes based on that number And if we put it in somewhere else it kind of distorts taxes But we broke it out on the trial bounds here so we could see it there and problems You're often going to say see someone something say like Calculate taxes between a 30 and 40 percent tax rate on that I believe there's like 40 percent tax rate of the 120 450 and then we could say if we subtract that out we get the 72 270 that matches what we have here 72 270 Now remember this is grouped by category I mean the cost of the inventory the operating expenses being selling and administrative not by the behavior We've got things that are variable and things that are fixed in most of those categories as opposed to the contribution margin So note the contribution margin income statement is going to end up at the same spot We're gonna have the 72 270 what we want to do though is break it out not by a category We want to break it out by behavior of the cost Why because behavior of the cost is something that we could really help with projections and That's what we'll take a look at in the in the next when we talk about the contribution margin per unit But so that's why we're doing it and we'll take a look at that more later We're still gonna start off with sales of course, so we're gonna take these same numbers We're gonna stick with sales, but instead of having cost of good soil We're gonna talk about variable costs now variable costs by behavior not by Categories so variable cost being the direct materials the direct labor and the sales commission So that's kind of funny that we have you know stuff that's related to making the inventory and stuff That's related to selling things and not included in the creation of the inventory in the same group That's funny for financial statement purposes, but it makes perfect sense for projection purposes So if we add those up with the total variable cost of 7 3800 And then if we take the look at the fix I'm sorry Then we get the contribution margin that's gonna be the sales minus the total variable costs that gives us the contribution margin So gross profit being the most important number on the normal financial statements Contribution of margin being the most important number here Because that's gonna be the relationship between the sales and the variable costs And we'll see the contribution margin per unit will also be quite important So then we have the fixed costs fixed cost being the things that will not change with the level of production and those include the Taxes on the factory. We're assuming that's gonna be fixed like sales tax or something like that on on the nuts sales tax property tax on the factory and then we've got the Maintenance on the factory again. We're assuming that's fixed we actually said so here and then we're saying the depreciation and The lease on the factory equipment as well as the administrative salaries Notice once again that we're talking about costs that are all over the place here We're talking about stuff that's included in inventory would be in cost gets sold and stuff That's that's in the administrative place here And then we've got the rent on the admissions Administrative office rent on the sales office. So now we have sales things in this fixed cost category And then we have the total fixed costs here again We found a home for everything except for the income tax because that's always gonna be broken out at the end And we would come up to the same income before income tax same number We had last time that being the contribution margin less the fixed costs And then we're gonna get the income tax and that's gonna be this number here And it's also like calculated as a percentage oftentimes when you look at types of problems and then we're gonna have the net income being the 124 50 minus the 41 80 income tax giving us the 72 270 Same number here. So we have the same number at the end of the day if we were good to compare this to the normal income statement So here's the income statement. Here's the contribution margin The thing to note here is that we're coming out with the same number We're coming out with the 72 270 72 270 bottom lines the same the breakout is what's different What's different about it over here? We're concerned about the categories the most important number is the relationship between Revenue and the cost of those revenues, but the cost of those revenues used some estimates because We have to to allocate both variable and fixed portions to get that number So that's where the gross profit is and then we had the categories of selling and administrative expenses So we're grouping by those categories and we're making Decisions and looking at things in terms of that format over here. We're grouping by behavior So we have the variable costs and the fixed costs broken out That's gonna be the grouping variable cost and fixed costs within there. We'll have things all over the place It's got stuff that's from the production of inventory It's got stuff from the selling and the administrative area the reason we're gonna do that for internal purposes And remember this is for internal purposes not for the external financials generally is that it's gonna help us with projections if we start to Assume that we're going to produce more or less We know that everything up here is gonna change at a fixed at a Standard rate it's gonna change at a standard rate and we know that everything down here to a certain level is not gonna change at all It doesn't matter how much stuff we we produce and that makes it a lot easier for us to start making projections So if we take a look at that for example the contribution margin per unit We would have the sales per unit so the sales per unit being this 285 And then we would have the variable cost per unit So the variable cost per unit if we pull out the calculator here We're gonna say the variable cost per unit are going to be the direct materials Which is the 247 950 Divided by the number of units in this case the units produced up here, which is the 435 0 We're gonna get the 57 so we got the variable cost per unit for direct labor 57 and then if we're going to have the variable cost per unit for the direct I'm sorry the direct materials was 57 if we take the direct wages would take the 387 150 Divided by the 435 0 and we get the 89 So we've got 89 and then we've got the last one last one's a little tricky It'd be the sales commission and again the sales commissions up here. That's something not normally we group together We're not used to seeing those together when we think about the normal financial statements because ones in cost gets old and one Is in sales but they act the same way. So we're gonna take the 95 7 divided by the 435 0 and that's the 22 All right, so then if we have these added up that's gonna be the total variable costs And then if we take the costs of the sales price minus the variable costs We come up with the contribution margin Per unit and the reason that's really important to be thinking about for anybody I mean even if it's like a hot dog stand to a large business It's the idea is well, how much does it cost per unit? How much am I getting per unit? I'm selling at a cost of 285 minus the variable portion That means we're walking away with 117 after variable costs things to change with the unit cells Then you're gonna ask well how many units will have to sell in order to Break even so the break even here you'd have to cover the fixed costs fixed costs being 388 500 Divided by the 117 and that would give us the we would have in this case 3320 the contribution margin Percent is here. That's gonna be this number seven over the 285 and that's gonna be the 41 Of course, it's rounded upwards