Under the contribution approach to the income statement, the difference between sales and is contribution margin. manufacturing costs cost of goods sold all fixed expenses all variable expenses
The Correct Answer and Explanation is :
Correct Answer: All Variable Expenses
Explanation:
The contribution approach to the income statement is also known as the contribution margin income statement. It categorizes costs based on their behavior—either variable or fixed—rather than their function (such as cost of goods sold, administrative, or selling expenses).
In this approach, the difference between sales revenue and total variable expenses is known as the contribution margin:
[
\text{Contribution Margin} = \text{Sales} – \text{Total Variable Expenses}
]
Why is “All Variable Expenses” the Correct Answer?
Variable expenses are costs that change with the level of production or sales volume. They include:
- Direct materials (costs of raw materials used in production)
- Direct labor (wages of workers who directly manufacture products)
- Variable manufacturing overhead (such as utilities for production)
- Variable selling expenses (such as commissions based on sales)
Fixed costs, on the other hand, do not fluctuate with production levels and include expenses like rent, salaries of administrative staff, and depreciation.
By subtracting total variable costs from sales, the contribution margin is obtained, which represents the portion of sales revenue available to cover fixed costs and generate profit.
Incorrect Answer Choices:
- Manufacturing Costs: Includes both fixed and variable costs, not just variable.
- Cost of Goods Sold (COGS): COGS typically includes both variable and fixed costs in a traditional income statement.
- All Fixed Expenses: Fixed costs do not affect the contribution margin calculation directly.
- All Expenses: Contribution margin does not consider fixed costs, only variable expenses.
Thus, the correct answer is “All Variable Expenses.”