Updated July 14, 2023
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 to measure the percentage of the variable cost to sales which is ultimately useful for the cost management in the company.
Explanation
In the 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 to the organization’s income. The variable cost income statement helps to measure the per unit variable cost, which changes with the change in revenue. The 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 that vary with the revenue.
Format of Variable Costing Income Statement
The format of the 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 made 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% of the 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 |
The 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
The advantages of the variable costing income statement are discussed and provided below-
- Helps in cost management and cost planning: Variable costing income statement helps the organization in cost management and planning so that optimum utilization of resources can be achieved and cost can be minimized.
- Helps in managerial decisions: Variable costing income statement helps in management decisions as management decisions 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.
- Operational 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 statement’s clear presentation increases the investors’ faith.
Disadvantages
The disadvantages of the variable cost income statement are discussed and provided below-
- The 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.
- The problem in the 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.
- The problem in Reporting: A variable cost income statement is unacceptable in tax 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 and variable costs, mainly when the nature of cost is semi-variable.
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 to arrive at the contribution and contribution per unit. Also, from the total contribution, the fixed cost is to be reduced to arrive at the profit made by the organization. But sometimes, it creates a problem as it is time-consuming, and it is difficult to divide the cost into variable and fixed costs.
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