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What is the difference between a contribution approach income statement and a traditional approach income statement?

Under the contribution approach (variable costing), all variable expenses (both manufacturing and non-manufacturing) are deducted first from sales to arrive at contribution margin. Fixed costs (both manufacturing and non manufacturing) are deducted from contribution margin to arrive at net income before taxes. Under traditional approach (absorption costing), all the manufacturing costs (both fixed and variable) are deducted from sales to arrive at gross profit (margin). Non-manufacturing (Selling and administrative) costs are then deducted from gross margin to arrive at net income before taxes.


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Contribution margin is the term used in marginal costing under which all unit costs are segregated as fixed cost and variable cost. It is generally assumed that any unit sold must atleast should recover it's variable cost in short term and after that any money earned by that unit is contributed towards recovering of fixed cost. So under breakeven analysis it is figured out by management that atleast how much units should be manufactured and sold to recover all it's fixed cost and start earning some profit.


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