MGT 3100 Chapter Notes - Chapter 6: Contribution Margin, Variable Cost
Chapter 6-Cost Behaviour Part 2
TRADITIONAL INCOME STATEMENT
• Traditional income statements are organized by function not by cost behaviour.
• Costs relating to production or purchases are recorded to COGS above the gross profit
line when they are sold.
• All other costs appear as operating expenses below the gross profit line.
• COGS is a variable cost for a retailer, but is a mixed cost for manufactures.
Generally VC since a change in units results in a
change in # of workers
Includes VC like indirect materials and indirect
labour and FC like property taxes and insurance.
CONTRIBUTION MARGIN INCOME STATEMENTS
• Contribution margin statements enable managers to quickly determine how costs will
change with volume and which will remain fixed.
• Arrange cost by behaviour rather than function
• Changes in volume will affect total sales revenue and total variable costs and,
changing the contribution margin
• Changes in volume will not affect fixed costs within the same relevant range
• Distinguishes the figures that will change from those that will not change with changes
in volume
• Can only be used internally since they are not acceptable for external reporting under
IFRS and ASPE
• Present all variable costs above the contribution margin line. Including:
• Any variable costs in merchandise sold or selling and admin
• Present all fixed costs below the contribution margin line.
• Any fixed costs relating to merchandise sold or selling and admin
• Contribution margin is equal to:
Sales Revenue-Variable Cost
• The challenge for creating a contribution margin statement is dealing with mixed costs.
• Mixed costs need to be separated into their fixed and variable portions.
Direct Materials
Direct Labour
Manufacturing
overhead
Inventoriable
product costs
+
+
=
A variable cost
Generally treated as a
variable cost
A mixture of fixed
and variable costs
A mixture of fixed
and variable costs
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