income statement under variable costing I BBA 5th SEM I BBS second year I Format

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An income statement prepared under variable costing, also known as a variable costing income statement, focuses on classifying expenses as either variable or fixed. In variable costing, only variable manufacturing costs (direct materials, direct labor, and variable overhead) are included in the cost of goods sold (COGS), while fixed manufacturing costs are treated as period expenses and are not included in COGS. Here's a simplified format of an income statement under variable costing:

Variable Costing Income Statement

Sales Revenue

Variable Costs
- Cost of Goods Sold (Variable Manufacturing Costs)
- Direct Materials
- Direct Labor
- Variable Manufacturing Overhead
- Variable Selling and Administrative Expenses
- Sales Commissions
- Shipping Costs

Contribution Margin
(Sales Revenue - Variable Costs)

Fixed Costs
- Fixed Manufacturing Costs
- Fixed Factory Rent
- Depreciation on Factory Equipment
- Salary of Production Manager
- Fixed Selling and Administrative Expenses
- Office Rent
- Salaries of Administrative Staff
- Marketing Expenses

Net Income
(Contribution Margin - Fixed Costs)

This format highlights the contribution margin, which represents the amount available to cover fixed costs and contribute to profit after variable expenses have been covered. The key difference between variable costing and absorption costing (another common costing method) is in how fixed manufacturing costs are treated. In absorption costing, these costs are included in the cost of goods sold, potentially leading to different profit figures compared to variable costing, especially when inventory levels change.