For Grading and Clear Written Communication: 1. Include a complete Cost of Goods Sold section inside each income statement: Beginning finished goods, etc. 2. Detail the cost in each income statement. For example, show the marketing expense separate from the selling and administrative expense inside the income statement. 3. Use a single underline to signal each math operation 4. Use a double underline on final totals For absorption costing, use the traditional (generally accepted accounting principles or GAAP) income statement format. Sales - Cost of goods sold = Gross margin Gross margin - Operating expenses = Operating income For variable costing, use the contribution margin income statement format. Sales - Variable costs = Contribution margin Contribution margin - Fixed costs = Operating Income Aside: Changing the format of the income statement does NOT change operating income, but changing from absorption to variable costing does. In other words, when operating income changes, it is because you changed how you do the costing, not because you changed how you lay out the income statement. on the face of the income statement. Sales: 2,500$3=$7,500 Sales: 2,500$3=$7,500