Cost Accounting

Are gross margin and contribution margin same

No; gross margin is not the same as contribution margin. Contribution margin is the difference between total revenues (TR) and total variable costs (VC) when using the variable costing method, whereas gross margin is the total revenues less cost of goods sold using the absorption costing method.

Some differences

  1. One point of difference between gross margin and contribution margin is that contribution margin is the sum of gross margin and fixed costs.
  2. GM will appear in absorption costing income statement, while the contribution margin will appear in variable costing income statement. CM sometimes provides a better picture of profitability rather than CM.
  3. Formula of gross margin is revenue less total manufacturing costs. Formula for contribution margin is revenue less all variable costs [Sales – variable costs].
  4. GM is useful for financial reporting purpose while contribution margin serves the purpose of internal cost reporting purpose. It has nothing to do with statutory reporting requirements.

It can be seen that both types of margins have their respective use according to the accounting department.

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