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Prepare income statements for a merchandising company using the traditional and contribution formats.
Learning objective number 5 is to prepare income statements for a merchandising company using the traditional and contribution formats.
Contribution Approach Income Statement
The contribution approach income statement organizes costs by behavior, first deducting variable expenses to obtain contribution margin, and then deducting fixed expenses to obtain net operating income.
The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled.
The contribution margin is total sales revenue less total variable expenses.
The Traditional and Contribution Formats
Used primarily for external reporting.
Used primarily by management.
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