The contribution margin income statement is an accounting document presented in the form of a financial table. It highlights the company's resources and expenses. The contribution margin income statement first deducts variable costs from turnover to determine the margin on variable costs. Fixed costs are then subtracted from this to obtain the net result. Studying the contribution margin income statement allows the accountant or manager to determine the strategy to implement to reduce losses and increase the company's profits.
The contribution margin income statement includes a number of items, namely:
- turnover,
- the variable costs,
- the margin on variable costs (MSCV),
- fixed costs,
- Net income.
Turnover is the primary component of the contribution margin income statement. It represents the sum of operating income (revenue from the sale of products and services). Variable costs are the expenses incurred by the company for its proper functioning. These include the purchase of raw materials, electricity, bonuses paid to employees, delivery costs, etc. The amount of variable costs depends on the company's activity and the volume of activity. The margin on variable costs is used to determine the most profitable products and services for the company.
Fixed costs are expenses that don't change with the amount of business you do. These include rent, salaries, insurance premiums and maintenance costs. Net income represents the profits made by the company during the financial year to which the income statement relates.
The contribution margin income statement is a tool very often used in management audits. It is used to analyze a company's performance and its ability to create wealth. The contribution margin income statement is particularly effective in defining the strategy implemented by managers and in ensuring that it achieves the expected financial equilibrium. If this is not achieved, you can use the tool to adjust the strategy in order to increase profit margins and limit losses. The main role of the contribution margin income statement is therefore to identify the margin that the company generates on its variable costs.
The tool looks at how expenses are funded by resources. It helps you analyze the organization's activities in more detail. The differential income statement aims to identify the level of activity needed to cover fixed costs.
You can also use it to make coherent financial forecasts and to establish a financing plan that is close to your business objectives. The differential income statement also allows you to identify certain financial indicators that are used to calculate the profitability of the company's activities. These are the break-even point, the safety margin and the shutdown point.
While both the standard income statement and the differential income statement can be used to analyze profitability, they aren't presented in the same way. The former is a tool that summarizes all of a company's expenses and income over a given period, known as a financial year or fiscal year. The standard income statement includes all of the company's expenses, which isn't the case with the differential income statement. The latter distinguishes between fixed and variable costs, allowing you to calculate the margin on variable costs, the safety margin, the break-even point, and the shutdown point.
The main difference between these two financial statements lies in how fixed and variable costs are distinguished. The differential income statement also gives you a more detailed analysis of the company's financial situation.
Written by our editorial expert
February 7, 2023
