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Absorption Income vs Contribution Margin Income

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?

Solution Preview

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 ...

Solution Summary

The solution examines absorption income versus contribution margin income.

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