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Absorption Income vs Contribution Margin Income

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1. What is the difference in calculation between the absorption costing and variable costing approaches?

2. Can you give specific benefits to be derived from using the information from computing gross profit on sales as opposed to contribution margin?

3. Is net income always going to be the same regardless of the accounting approach?

4. Why don't we use the contribution margin format for external reporting?

5. Which income statement is classified by function, and which one is classified by behavior?

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1. What is the difference in calculation between the absorption costing and variable costing approaches?

Under the absorption costing, the cost of goods sold is reduced from the sales to arrive at gross margin and net income is found out by reducing the operating expenses from the gross margin. However, under the variable costing approach, variable cost is reduced from sales to arrive at the contribution margin and fixed cost is reduced from the contribution margin to arrive at the net income.

2. Can you give specific benefits to be derived from using the information from computing gross profit on sales as opposed to contribution margin?

There are some specific benefits of computing gross margin as opposed to contribution margin. Since gross margin is computed by reducing the cost of goods sold from the ...

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The solution examines absorption income versus contribution margin income.

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See Also This Related BrainMass Solution

Absorption Income versus Contribution Margin Income: Example

The background materials present the computations for both gross profit on sales and contribution margin. Can you give specific benefits to be derived from using the information from computing gross profit on sales as opposed to contribution margin? Is net income always going to be the same regardless of the accounting approach?
Why don't we use the contribution margin format for external reporting?
Which income statement is classified by function, and which one is classified by behavior?
Look at the income statements below before you answer the questions.

ABC Company sells 10,000 widgets. The company has no beginning or ending inventory. Using the absorption approach (GAAP) the net income of the company is as follows:

Sales (10,000 @ $20) $200,000
Cost of goods sold (10,000 @ $12) 120,000
Gross profit $ 80,000
Expenses 20,000
Net income $ 60,000
Using the contribution margin approach the net income of the company is as follows:
Sales (10,000 @ $20) $200,000
Variable cost of goods sold (10,000 @ $8) 80,000
Contribution margin $120,000
Fixed expenses 60,000
Net income $ 60,000

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