A variable cost income statement is a type of financial statement that focuses on the relationship between the variable expenses associated with the operation of a business enterprise and the income that is realized by that enterprise. Typically, this type of statement is prepared before the issue of fixed costs is addressed. Doing so can aid in more closely identifying expenses that can be adjusted in some manner in order to increase the amount of net returns generated from the production of goods and services.
The main function of a variable cost income statement is to highlight business expenses that are not considered fixed. Fixed expenses do not change from month to month and can be accounted for with relative ease. By contrast, variable or floating expenses can change from one accounting period to the next, sometimes to a significant degree. Monitoring changes in the variable expenses makes it easier for company owners and managers to take whatever measures are necessary to remain within the budget and avoid the necessity of making use of contingency funds that are set aside for emergencies.
One of the benefits of a variable cost income statement is the ability to look closely at the expenses that tend to fluctuate from one accounting period to the next, and make sure the business operation is keeping those expenses within reason. Unlike fixed expenses that are the same from one period to the next, it is possible to identify trends with variable expenses that may not be in the best interests of the company. By preparing the variable cost income statement before moving on to the creation of a statement that takes into account all the expenses incurred for the time frame under consideration, the company can identify unfavorable trends early on and take steps to deal with those trends.
The degree of detail found in a variable cost income statement can vary. The simplest format calls for nothing more than a total of all variable expenses related to the period, followed by the income received or at least generated during the same period. Subtracting expenses from income provides a net income figure that can be compared to the statements prepared for past periods. A more comprehensive approach would call for itemizing both the variable expenses and the different sources of income, making it easier to identify where increases and decreases occurred in comparison to past periods. This latter format is often a good idea if managers are closely monitoring variable expenses such as the cost of raw materials or labor costs, seeking to keep those expenses within a given range.