The differential income statement is an accounting document in the form of a financial table. It highlights the company's resources and expenses. The differential income statement first deducts variable costs from sales to determine the contribution margin. Fixed costs are then subtracted to obtain net income. By studying the differential income statement, the accountant or manager can determine the strategy to be implemented to reduce losses and increase profits.
The differential income statement includes a number of items, namely :
- sales,
- variable costs,
- margin on variable costs (MSCV),
- fixed costs,
- net income.
Sales are the first component of the differential income statement. It represents the sum of operating revenues (income from the sale of products and the provision of services). Variable costs are the expenses incurred by the company in running its business. These include the purchase of raw materials, electricity, employee bonuses, delivery costs, etc. The amount of variable costs depends on the company's activity and business volume. The contribution margin can be used to determine the most profitable products and services for the company.
Fixed costs are expenses that do not vary with business volume. They include rent, salaries, insurance premiums and maintenance costs. Net income, on the other hand, represents the profits made by the company during the financial year to which the differential income statement relates.
The differential income statement is a tool frequently used in management control. It is used to analyze a company's performance and its ability to create wealth. The differential income statement is particularly effective for defining the strategy implemented by management, and for ensuring that it achieves the desired 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 differential income statement is therefore to identify the margin the company generates on its variable costs.
In particular, the tool looks at how expenses are financed by resources. It enables a more in-depth analysis of the organization's activities. The incremental income statement aims to identify the level of business that needs to be generated to cover fixed costs.
You can also use it to make consistent financial forecasts and to draw up a financing plan that is closer to your business objectives. The differential income statement also enables you to identify certain financial indicators that are used to calculate the profitability of the company's activities. These include break-even point, safety margin and breakeven point.
While both the classic income statement and the differential income statement are used to analyze profitability, they are not presented in the same way. The former is a tool that summarizes all a company's income and expenses over a given period. This is referred to as theaccounting or taxyear. The classic income statement brings together all the company's expenses, which is not the case with the differential income statement. It distinguishes between fixed and variable expenses. This makes it possible to calculate the contribution margin, the safety margin, the break-even point and the breakeven point.
The main difference between these two statements lies in the distinction between fixed and variable costs. The differential income statement also provides a more detailed analysis of the company's financial situation.
Written by our editorial expert
February 7, 2023
