Summarize and Compare Traditional Income Statement and Contribution Format Income Statement

Summarize and compare traditional income statement and contribution format income statement

In particular, a contribution income documents or statements depict variable and fixed cost and variable cost comprehensively, so the contribution margin is manufactured effectively and efficiently. According to Datar, Foster, Horngren, Ittner, and Rajan "the income statement is called a contribution income statement because it groups costs into variable cost and fixed costs to highlight contribution margin". Generally, a contribution income statement is used for internal purposes by business organizations, so business organizations can strategically plan to forecast business organizations profits annually.

Furthermore, contribution margin is critical due to the contribution margin enabling business organizations to display how lucrative or profitable company's products are due to contribution margin examining profits, fixed and variable cost, sales, fixed and variable cost of goods sold. Consequently, the contribution income statement enables business organizations to indicate profits clearly.

Generally, fixed cost never change, which means that fixed cost remain stable and typically cost is unchangeable. Generally, fixed costs are not affected by a business organizations production. However, variable cost typically fluctuates, which is affected significantly due to company production changing. Moreover, contribution margin focuses on variable costs, which is unpredictable and cost frequently changes. Consequently, the contribution margin enables business organizations financial managers to produce precise business forecasting and analysis about corporations future profits.

Nevertheless, a traditional income statement displays sales, revenue, profits, taxes, depreciation, supplies, and rent when creating traditional income statements for a service business. Nonetheless, retail or manufacturing business organizations traditional income statement encompasses: administrative expenses, selling expenses, gross margin, cost of goods sold, and sales.

Consequently, manufacturing and retail corporations business executives can examine business periods profits, but is prohibited from forecasting about corporations future profits utilizing traditional income statement. A traditional income statement will not allow business executives to forecast future profit, because a traditional income statement is prohibited from including expenses such as variable cost.

Furthermore, a traditional income statement displays how much capital business organizations produced, which is referred to as revenue and how much capital the business organization has spent, which is labeled as business expenses. In addition, a traditional income statement generally has the following financial components: expenses, heading, and revenue. To be specific, for the heading a business organization must insert business organizations name, time duration of financial performance i such as quarterly, annually, or monthly, and the name of the financial documents.

Further, the revenue area displays the capital being produced from corporation's sales. Total revenue is capital the corporation has manufactured from multiple income sources such as credit sales, fees, cash sales. Generally, when calculating credit a sales, fees, and cash sale creates the total revenue. Consequently, business organizations can acknowledge clearly