Variable and Fixed Costs Essay Example | Topics and Well Written Essays - 500 words - 1

Variable and Fixed Costs - Essay Example Unlike in the absorption costing, all the variable expenses under the contribution income statement are deducted from the sales to get the contribution margin. This is followed by deducting fixed costs from the contribution margin to get the net profit or loss for a particular period. Under the absorption costing and contribution costing the net income is always the same only when the inventory is the same. Otherwise the income is higher under the absorption income statement that in the contribution income statement when the inventory is higher. Even though the fixed production costs under the contribution income statement are aggregated at the lower part of the income statement, all the variable and the administrative expenses are taken into consideration during the computation of the net profit thus making the two methods to have similar net profits when the income is the same. However, the similarity ends when a firm increases its inventory. Companies should create another income statement in a different format in order to undertake a comparison. Based on the impact of the inventory on the income of a company, an extra income statement helps the financial managers to show actual income of the company. One of the major aspects that are depicted by the preparation of income statement using the contribution margin format is that it helps the management in determining the proportion of the expenses that has impact on the revenues of a company. In this regard, it helps the management on adopting ways of minimizing such expenses in order to increase the profits. It is vital to note that fixed costs in the manufacturing of any product must be incurred. This implies that under the variable costing techniques, management is assisted on how to recover the fixed expenses in order to survive. Break-even analysis is a useful tool especially to the marketers. It entails the sales volume expressed in units that is