Contribution Margin Versus Gross Margin and Operating Income Versus Net Income

As discussed in the video, contribution margin and gross margin represent two different ways to slice the same pie.

+ Figure 1.8. Text Description

Contribution margin

Revenues

− Variable costs

= Contribution margin

− Fixed operating costs

= Operating income

 

Financial accounting

Revenues

- Cost of goods sold

= Gross margin

− Operating expenses

= Operating income

Figure 1.8 presents the same operating income broken down two different ways.

Sometimes it is unclear to individuals how the accounting information used in managerial accounting is related to the accounting information used in financial accounting. One area where the connection is lost is in the constant use of operating income in managerial accounting. However, this concept of operating income is the same in financial accounting and managerial accounting as shown in the video and below.

Summary of the Income Statement Format Used in Financial Accounting

+ Figure 1.9 Text Description

Total revenues from operations
− Cost of goods sold
= Gross margin or gross profit
− Operating expenses (excluding income taxes which are deducted later)
= Income from operations (Operating income as shown above in managerial/cost accounting)
+ Nonoperating revenues (such as interest revenue)
− Nonoperating costs/expenses (such as interest expense)
= Income before income taxes in financial accounting
− Income taxes
= Income from continuing operations in financial accounting
± Discontinued operations
= Net Income in financial accounting

 

In managerial accounting, these non-operating items that can appear on the income statement are generally irrelevant to the decision at hand and, therefore, are ignored.

---