 In this presentation, we will construct and analyze a contribution margin income statement. Last time, we took a look at a normal type of income statement. The type of income statement we would see in financial accounting, the types of groupings that we would see in financial accounting we broke. Support accounting instruction by clicking the link below, giving you a free 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 when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Look it out and constructed it from a trial balance. We want to keep this in mind when we consider a contribution margin type of income statement because we want to compare and contrast against it. Remember that this income statement, the normal income statement is what we would consider in financial accounting, what we would consider in a normal generally accepted accounting type principles or normal type of accounting, a cruel accounting structure. However, we want to break that out into a different type of format, one we won't be used to if we've been working with financial accounting because this is a managerial accounting tool, which means it's not required for external users as is the normal type of income statement but can be useful and therefore we need to analyze whether or not the added information would be useful or benefit to us for decision making. And what we're going to do then is take this same information, we'll construct it from the same trial balance, we'll get to the same type of net income but instead of breaking this information out by category, what we're using this information for or what these expenses are for by grouping of their function to help us to get the goal of generation of revenue, we're going to be breaking them out by behavior. How they behave, that makes it a lot easier for us to do projections into the future. So keep in mind the grouping here by function cost a good soul, that's what it is inventory that we sold selling and administrative expenses selling that's what it's doing with the sales type of items, the administrative that is what it's doing. Now we're going to move to the contribution margin income statement and we'll talk about it broken out not by what we're doing but once again by the behavior. So we have the revenue, it's still going to be starting off at the top line, we have the revenue and then we're going to have the variable costs. This is not something that you'll see on a normal income statement, we don't have variable costs broken out on an income statement. It is a managerial accounting type of concept that we will be using for projections and it means of course that we're looking for those expenses, we're taking all of these expenses. We're going to break them out to variable or fixed and we're going to be very specific on that. We want to make it variable fixed any other costs that behave differently, we're going to try to break them out. We will break them out in one in some format into variable or fixed and that means that we're going to have to do some estimates to do that but for now we're going to make it a clean break. We're going to say everything fits into variable or fixed costs and the variable costs will change with the level of production in a standard format. So if I go up by fixed amount for each level of production down by fixed amount for each level or increase or decrease of production and so we're going to say that the direct materials then are going to be part of the variable costs. They will increase and decrease with proportion to the level of production that we have the direct materials here and then we're going to include the direct wages so the direct wages are also things that we're going to say here increasing and decreasing with an increase and decrease with the level of the production. Now don't get confused here because you might think well this looks a lot like the normal financial statement with these two items up top kind of towards the top in what we would call before cost of goods sold. This isn't cost of goods sold they happen to be in the same area because those are the things that are in production and therefore change with relation to changes in the amount of production. The next item then we're going to have here is the sales commission and the sales commission is not something that we're used to seeing up here on the top of an income statement because it has nothing to do with cost of goods sold it usually goes into selling and administrative but this time it's variable because it's sales commission it's commission meaning it's going to be changing as we increase or decrease the level of production and sales and therefore it's going to be up here in the variable costs section odd because it's not grouped by what it does for is grouped by what the function of the cost is going to be and again why would we do this we'll see this a lot more clearly when we start to do projections into the future but we'll see that by grouping these by behavior it will be beneficial to us for projection purposes that'll give us the total variable costs which is going to be the direct materials the direct wages and the sales commission in this case giving us the break out of the 730 thousand eight hundred seven thirty eight hundred then we're gonna have the contribution margin again this is this is something that will be familiar with once we start to look at this analysis not something we've seen in financial accounting it's not on normal financial accounting because typically around this area we would expect to see something called gross profit possibly not the same thing not even related totally different things because we're breaking this out in a different format does they both do start in the same area sales versus revenue here but in a normal income statement we would then have the cost of goods sold here we have the variable costs revenue minus the variable costs gives us the contribution margin and the next item we're gonna have then are the fixed costs so fixed costs remember are those costs that do not change with the level of production so the normal type of fixed costs we're gonna have the most common one I would say is the rent the rent is going to be fixed it is what it is we can produce a lot more we can produce a lot less we're gonna have the same amount of rent typically up to at least a certain level that we might have to increase or decrease the rent but for the most part same amount of rent so the fixed costs we're gonna say here are gonna be the taxes on the factories so the taxes on the factory we're gonna say are fixed we got the maintenance on the factory we're gonna say that that's fixed for our example here we're gonna say that depreciation on the factory it's gonna be a fixed type costs lease on the factory it's gonna be a fixed cost admin gonna be fixed costs and then rent on the administration and rent on the sales office and then the total fixed cost now you might be thinking here hey this looks kind of similar to like a normal income statement because a lot of the costs we saw up here in the normal income statement are matching over here not exactly but a lot of the costs down here kind of match up not exactly that we saw in the normal type of income statement why is that well it's because basically the variable costs tend to be things that change with the level of production and on a normal income statement what would be up top is gonna be the cost of goods sold the product the grouping of what we do for production but they're not the same categories the grouping on the normal income statement is cost of goods sold we're grouping by those things that we're using to put into the cost of good sold the things that would differ there like the things that have fixed costs often time would be like the overhead would be included in cost of goods sold and over here it wouldn't be because it would be down here so things like the rent on the factory and stuff like that are our fixed costs so note they're not going to be the same thing even though we saw these two items up top direct materials and direct wages in the variable costs on the contribution margin in a similar place that we would see under cost of goods sold on the normal kind of income statement here they're here for different reasons by behavior and down here we have a similar characteristic in that administrative salaries are administrative costs and sales costs that we see in a normal income statement are usually fixed and therefore we see them here as well on this bottom part not because they're their operating expenses types of grouping or selling and administrative grouping but because they happen to be fixed and therefore on the bottom part of this contribution margin income statement in the fixed costs area so they could you might in other words see some of these costs in similar areas just in location on the income statement start to think that that means something and it does it doesn't really accept for the fact that they happen to behave in a similar fashion that lands them on the same kind of location in terms of approximate location on an income statement okay so that's going to be the total fixed costs and then we're going to have the contribution margin where we left off in the hour column minus the total fixed costs gives us the income before the income taxes then the income taxes then we end up at the same bottom line number that 72,000 seven two hundred and seventy that we ended up on in the normal type of income statement so we end up in the same place why would we do this you might look at this and say this doesn't give me a lot of information that the other type of income statement gives me because I can't give a relationship between say the gross profit and the sales and and that kind of thing but what we can do is now start to think and project forward and say well what would happen if there's changes in production level and that's what we'll get into later that's really what we can do here when we're making stuff when we're going to have changes when we things are moving when we're trying to figure out well what if we do this what if we do that a structure like this allows us to make those projections much more easily we'll start to look at the calculations that will help us do that in the future