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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