The top line is revenue and the bottom line is net income in both formats. The difference lies in the derivation of the net income and the interpretation of these income statements. Basics The traditional income statement format uses absorption or full costing, in which variable and fixed manufacturing costs are part of the inventory costs and, thus, part of the cost of goods sold calculation. The contribution margin format uses variable costing, in which fixed manufacturing costs are part of the overhead costs of the accounting period and are not part of the product costs.
The reason why the father wished to close down the branch was that it appeared to be making a loss. However, it is quite the reverse; if the branch was closed then, the positive contribution from the branch would be lost and overall profits would fall. This is because the indirect costs of production do not vary with output and, therefore, closure of a section of the firm would not lead to immediate savings.
This may mean that closing the branch would be a mistake on financial grounds.
This mistake is made due to a misunderstanding of nature of cost behavior. If the branch is closed then the only costs that would be saved are the costs directly related to the running of the branch: The costs are indirect in nature, in this example the marketing and central administration costs, would still have to be paid as they are unaffected by output.
For this decision to be made, we should use contribution as a guide for deciding whether or not to close a branch. This can also be applied to the production of certain product lines, or the cost effectiveness of departments.
On financial grounds, contribution is therefore, a better guide in making decisions.Comprehensive glossary of over real estate terms, local information, free advice for home buyers and sellers.
Convert Ekland absorption income statement to a contribution margin income statement. Ystad Industries. Roland Andersson is the manager of the Ekland Division of Ystad Industries.
How to convert cost absorption into a contribution margin income statement: All divisions use standard absorption costing. The division has the capacity to produce 50, units a quater and quarterly fixed overhead amounts to $, A coral reef is an underwater ecosystem characterized by reef-building r-bridal.com are formed of colonies of coral polyps held together by calcium r-bridal.com coral reefs are built from stony corals, whose polyps cluster in groups..
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Convert Ekland absorption income statement to a contribution margin income statement Prepare absorption and contribution margin income statements for the three shortcomings of the absorption approach for with you own thoughts and contributions.
Basics. The traditional income statement format uses absorption or full costing, in which variable and fixed manufacturing costs are part of the inventory costs and, thus, part of the cost of.