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A contribution income statement (CIS) is an alternative to the more commonly employed absorption style of income statement, and uses a different basis for organizing the data found on the document. With a contribution income statement, the data is arranged with behavior in mind rather the more traditional approach of structuring the income state on the basis of function. This arrangement can sometimes show the connection between the fixed and variable costs associated with a particular cost item to better effect, a benefit that can be very helpful in terms of cost analysis.
The use of a contribution income statement is intended for internal use only, and is normally not shared outside the confines of the company structure. Typically, the statement is prepared alongside a more conventional absorption-style income statement, allowing the business to present the data in a format that is in line with the preparation of financial statements that go to investors as well as use in justifying line items on a tax return. While the latter works well for all external purposes, the CIS is very helpful for managers, owners, and others who are concerned about how money is being spent within the company, and what type of return is being generated as the result of those expenditures.
There are three primary benefits to the preparation of a contribution income statement. The arrangement of the data lends itself well to various types of analysis, since it is simpler to determine the relationship between cost, volume of production, and the profit generated from that production. Since the data is arranged on the basis of behavior, this form of income statement is also helpful in assessing departmental performance overall and the quality of leadership provided by a departmental manager. The statement is also helpful when there is a need to make a quick decision that is somewhat outside the realm of day to day operations, especially if the outcome of that decision could have a positive or negative short-term effect on the finances of the company.
While it is possible to manually prepare a contribution income statement along with the absorption type of income statement, many brands of accounting software include the ability to prepare both formats without a great deal of difficulty. As long as the data entered into the database is correct, both reports can be prepared in a matter of minutes. This means that the statement can be generated as often as necessary in order to provide up-to-date information for use in a number of different projects.
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