Variable Costing Income Statement

Definition of Variable Costing Income Statement

Variable costing income statement is the type of income statement which is prepared to determine the contribution made by the organization, and it is calculated by deducting the variable cost from the revenue of the organization so as to measure the percentage of the variable cost to sales which is ultimately useful for the cost management in the company.

Explanation

In variable costing income statement, all the variable cost is to be deducted from revenue to arrive at the contribution where the contribution is the amount contributed in the organisation’s income. Variable cost income statement helps to measure the per unit variable cost, which changes with the change in revenue. Higher the variable cost lesser will be the contribution. Variable costing income statement helps to manage the cost of the organization and through which the profit is to be maximized. From contribution, fixed cost is to be deducted to arrive at the profit made by the organization. The purpose of the variable costing income statement is to determine the proportion of expenses which are variable in the nature and varies with the revenue.

Format of Variable Costing Income Statement

Format of Variable Cost Income Statement is presented as under:

	Particulars	Amount ($)	Amount ($)
1	Revenue		–
2	Less: Variable cost:
	Material Cost	–
	Labour cost	–
	Overhead cost	–
	Production Overheads	–
	Sales Overhead	–
	Variable Selling and Admin cost	–	–
3	Contribution (1 – 2)		–
4	Less: Fixed Cost
	Rent	–
	Fixed Salaries	–
	Interest Cost	–
	Fixed Manufacturing Overheads	–
	Fixed Selling and Distribution Overheads	–	–
5	Net Income (3 – 4)		–

Examples of Variable Costing Income Statement

Following are the examples are given below:

Example #1

An Ltd is in the manufacturing business; the organization maintains the variable cost accounting statement for its internal purpose, which helps them take financial decisions and financial planning. During the financial year 2019 – 20, the organization has made the sales of $900,000, i.e., 4000 units. The cost details are as under:

Particulars	Amount ($)
Cost of Material Purchased	150,000.00
Labour cost variable	120,000.00
Production Overheads	200,000.00
Sales Overheads	100,000.00
Rent	140,000.00
Taxes	25,000.00
Fixed Salaries	310,000.00
Repairs	30,000.00
Interest	40,000.00

30 Percent of Production overheads are fixed in nature

25 percent of variable overheads are fixed in the nature

Prepare the Variable Cost Income Statement?

Solution:

Calculation of Variable Cost

Particulars	Amount ($)
Cost of Material Purchased	150,000.00
Labour cost variable	120,000.00
Production Overheads (70 %)	140,000.00
Sales Overheads (75 %)	75,000.00
Taxes	25,000.00
Repairs	30,000.00
Total	540,000.00

Calculation of Fixed Cost

Particulars	Amount ($)
Rent	140,000.00
Interest	25,000.00
Production Overheads (30 %)	60,000.00
Sales Overheads (25 %)	25,000.00
Total	250,000.00

Variable Cost Income Statement

Particulars	Amount ($)
Revenue	900,000.00
Less: Variable Cost	(540,000.00)
Contribution	360,000.00
Less: Fixed Cost	(250,000.00)
Profit	110,000.00

Example #2

An Ltd has a variable cost of $ 500 per unit and a fixed cost of $ 240,000. The Gross Profit margin of the company is 25% on cost. The target of the company is to sell 10,000 units during the period. Determine the selling price as well as profit from targeted sales?

Solution:

Variable Cost income statement for 100,000 units

Particulars	Amount ($)
Variable Cost ($ 500 * 10000 units)	5,000,000.00
Fixed Cost	240,000.00
Total Cost	5,240,000.00
Add: Profit Margin (25% * 5,240,000)	1,310,000.00
Sales	6,550,000.00

Selling Price per unit is calculated as

Selling Price per Unit = Sales / Selling Units

• Selling Price per Unit = 6,550,000 / 10,000
• Selling Price per Unit = $655 per Unit

So the selling price should be $ 655 per unit to earn the standard profit of 25 percent on cost.

Advantages

Advantages of variable costing income statement are discussed and provide below-

• Helps in cost management and cost planning: Variable costing income statement helps the organization in cost management and planning so as optimum utilization of resources can be achieved and cost can be minimized.
• Helps in managerial decisions: Variable costing income statement helps in management decision as management decision will only help to reduce the variable cost on the basis of data presented in the variable cost income statement.
• Helps to fix the price of the product: Variable cost income statement helps to give the idea about the price of the product which is to be charged as the price of the product should be that much to recover all the cost incurred.
• Better operational planning Operation planning can be better with the variable costing income statement as it helps determine the sale price and maintain sufficient liquidity or free funds to do the expense.
• Better Analysis: With the variable cost income statement, the analysis of the contribution to sales becomes easy, and the clear presentation of the statement increases the faith of the investors.

Disadvantages

Disadvantages of the variable cost income statement are discussed and provide below-

• Problem of Inaccurate Costing: Sometimes, the nature of cost is semi-variable and indispensable. Hence the bifurcation becomes difficult, and the problem of inaccurate measurement of variable cost arises.
• Problem in Valuation of Inventory:  Under variable costing, there is a problem in the valuation of inventory as the fixed cost portion is not added while valuing the closing inventory of the company.
• Problem in Reporting: Variable cost income statement is not acceptable in tax reporting or financial reporting. It is to be prepared only for the internal purpose.
• Time Consuming: Variable cost income statement preparation is a time-consuming process as sometimes it is difficult to bifurcate the cost into fixed cost and variable cost, mainly when the nature of cost is semi-variable in nature.

Conclusion

The variable cost income statement is one of the types of an income statement prepared for internal purposes like management decisions, cost reduction, cost management, etc. In the variable cost income statement, variable cost is to be reduced from the amount of revenue in order to arrive at the contribution and contribution per unit. Also, from the total contribution, the fixed cost is to be reduced so as to arrive at the profit made by the organization. But sometimes creates a problem as it is a time-consuming method, and it is difficult to divide the cost into variable cost and fixed cost.

Recommended Articles

This is a guide to Variable Costing Income Statement. Here we also discuss the definition and example of variable costing income statement along with advantages and disadvantages. You may also have a look at the following articles to learn more –

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