10.7 Operating Earnings (EBIT): Standard Accounting (Reporting) versus Cost Accounting

The accountant and the cost accountant each have their own different ways of arriving at the same operating earnings figure – EBIT. Let’s see how each does his work.

Reporting  Cost Accounting 
Total Revenues Total Revenues
(Cost of Goods Sold) (Variable Costs)
Gross Profits  Contribution Margin 
(Selling, General, and Administrative Costs) (Fixed Costs)

Neither presentation is “better” than the other necessarily; each simply serves a different function or end. The accounting report is intended to provide a summary of the financial results of the corporation for outside readers’ consumption. The cost accounting analysis is intended for internal assessment and corporate planning purposes alone.

Some use Δ Contribution Margin ÷ Δ EBIT to measure DOL. Same difference in terms of ranking one company to another, but not in the actual numbers.


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Corporate Finance Copyright © 2023 by Kenneth S. Bigel is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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