Contribution Income Statement and Traditional Income Statement Essay

Introduction

The key difference between a contribution income statement and a traditional income statement is that the former focuses on the impact of changes on the profits, whereas the latter emphasizes the net profit. The contribution income statement essentially distinguishes fixed costs from variable costs. It seeks to see and assess the contribution margin, which is calculated by measuring variable administrative and selling expenses alongside product costs (Hoggett et al., 2020).

Discussion

Therefore, the contribution income statement does not include fixed costs as part of the product expenses since they are considered overhead costs. The traditional income statement accounts for both period costs as well as product expenses incurred during manufacturing (Hoggett et al., 2020). It analyzes the full cost of a good sold, where fixed and variable expenses are subtracted to arrive at the net profit. In the case of circumstances, the contribution income statement is used to analyze the overall performance of specific product categories or individual products. It is most useful for stakeholders and investors since it demonstrates the profitability gained through changes in strategies or tactics, which are reflected in variable costs primarily (Hoggett et al., 2020). However, the traditional income statement is useful in conventional circumstances of accounting and reporting for external purposes (Wild & Shaw, 2018). In other words, its use is relevant when filing taxes, adhering to legal procedures, or issuing information to the public.

Conclusion

The justification is that shareholders and investors are mostly interested in how an organization is performing because they collectively decide what strategies and directions to implement (Wild & Shaw, 2018). They want to be able to see whether or not new changes are bringing profit and not being compensated by the main products, which is not evident in the traditional income statement.

References

Hoggett, J., Medlin, J., Chalmers, K., Beattie, C., Hellmann, A., & Maxfield, J. (2020). Accounting (11^th ed.). Wiley.

Wild, J., & Shaw, K. (2018). Fundamental accounting principles (24^th ed.). McGraw Hill.