Differences Between Absorption and Contribution Income Statements

There are several differences between absorption and contribution income statements. They include:

The cost of direct material and direct labour as well as fixed and variable manufacturing overheads are all included when calculating the inventory’s cost per unit under absorption income statement,while in the contribution income statement,the only cost included in cost per unit computation is direct material and directlabour plus the variable manufacturing overheads(Baiman, 1990). In contribution income statement, fixed overheads are not included in the inventoty’s cost per unit.

Another difference is that in absorption costing income statement,cost of goods figure is usually deducted from sales to find the gross margin, while under contribution income statement, the amount of variable expenses is usually deducted from the total sales to get the total contribution margin and then fixed expenses figure isthen deducted from the remainder in order to get the total sales amount (Healy, 1985). Lastly, valuation of inventories in absorption costing income statement are performed at full costs while in contribution costing income statement, valuation is carried out at variable costs.

Although there are variations on how computations are carried out under the two income statements, the amount of net income arrived at is usually the same in both instances if production is equal to sales. However, if production is higher than sales, the amount of profit presentedby absorption costing is usually more than that presented under contribution costing income statement. This variance is attributed to the valuation of closing stock, which is usually done at higher cost under absorption costing than in contribution costing (Healy, 1985).

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