Question

Examine the elements of the cost-volume-profit (CVP) income statement and provide your opinion on the benefits of its use for decision making by the management of the company researched over traditional income statements under generally accepted accounting principles (GAAP).

Answer 1

Traditionally Cost –Profit-Volume analysis or CVP analysis as it is famously known is used for decision making in manufacturing industry to arrive at various costing decision. The implication of it in income statements helps managers at internal decision making level.

Like in costing, the CVP analysis helps in decision making by evaluating income statement on same premise, that is, segregating the expenses to variable and fixed, generalising contribution, performing break even targets and evaluating impact of fixed cost and variable cost on revenue generated to help them ascertain what value changes impact businesses.

CVP analysis of income statement breaks income statement into variable and fixed components and help managers identify various impacts on revenue, gross profit and net profits of business and the use of CVP analysis in income statement also helps in comparing two businesses.

The CVP analysis of income statement has the same information as that of traditional financial statements but the presentation in format of CVP analysis helps managers to make a better decisions unlike traditional plain vanilla financial statements which are more of presentation based rather than helping in decision making which can be achieved by CVP analysis.

The format of presentation may differ from one requirement to another as management decides on focussing on things required for decision making that is to say it is customisable as per user needs and requirement and there is no fixed presentation format.