What Are the Differences Between a Traditional Income Statement and a Contribution Margin Income Statement
by Craig Borowski | Updated Aug. 5, 2022 - First published on May 18, 2022
Traditional and contribution margin income statements provide a detailed picture of a company's finances for a given period of time. While both serve the purpose of showing whether a company has a net profit or loss, they differ in the way they arrive at that figure.
Traditional income statement
Also known as a profit and loss statement, a traditional income statement shows the extent to which a company is profitable or not during a given accounting period. It provides a summary of how the company generates revenues and incurs expenses through both operating and non-operating activities.
Contribution margin income statement
In a contribution margin income statement, a company's variable expenses are deducted from sales to arrive at a contribution margin. A
contribution margin is essentially a company's revenues minus its variable expenses, and it shows how much of a company's revenues are contributing to its fixed costs and net income. Once a contribution margin is determined, a company can subtract all applicable fixed costs to arrive at a net profit or loss for the accounting period in question.
The difference between traditional income statements and contribution margin income statements
While a traditional income statement works by separating product costs (those incurred in the process of manufacturing a product) from period costs (those incurred in the process of selling products, as opposed to making them), the contribution margin income statement separates variable costs from fixed costs.
In a contribution margin income statement, variable selling and administrative periods costs are grouped with variable product costs to arrive at the contribution margin.
A traditional income statement uses absorption or full costing, where both variable and fixed manufacturing costs are included when calculating the cost of goods sold. The contribution margin income statement, by contrast, uses variable costing, which means fixed manufacturing costs are assigned to overhead costs and therefore not included in product costs.
Companies are generally required to present traditional income statements for external reporting purposes.
Contribution margin income statements, by contrast, are often presented to managers and stakeholders to analyze the performance of individual products or product categories. Companies can benefit from contribution margin income statements because they can provide more detail as to the costs and resources needed to produce a given product or unit of a product.
While both income statements ultimately serve the purpose of showing whether a company is profitable or not over a certain period of time, the contribution margin income statement can offer additional insight as how to that net profit or loss came to be.
Alert: highest cash back card we've seen now has 0% intro APR until 2024
If you're using the wrong credit or debit card, it could be costing you serious money. Our expert loves this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our expert even uses it personally. Click here to read our full review for free and apply in just 2 minutes.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.