Question

Dear Exparts,

Could you explain the importance of CVP (cost, volume, profit) Income Statement?
a) Compare and contrast the traditional Income Statement vs CVP Income Statement format.
Show 3 examples as the difference between the traditional IS vs CVP IS format.
b) Show examples supported by numbers of how we would use CVS calculations.

Answer 1

Cost, Volume, Profit (CVP) statement is critical from a management perspective to take a variety of decisions like accept or reject order, pricing, calculation of break even point, sales required to achieve a certain level of profitability. In CVP analysis, more emphasis is laid on any variable/incremental costs, rather than total cost of production. Therefore, for any decisions, fixed costs are considered irrelevant (as they would be incurred irrespective of production capcacity), The variable/incremental costs and incremental income are the factors taken into consideration for decision making. In CVP analysis, all fixed costs are immediately written off. In traditional income statement, fixed costs are allocated to the total production, and only the costs attributable to goods sold is charged to profit and loss account.

Formats of Income Statement

Key difference:

1. In CVP analysis, costs are segregated into fied and variable costs whereas, in traditional income statement, no such segregation is made

2. In CVP analysis, entire fixed manufacturing costs are charged off as period expense. In traditional IS, the fixed costs are allocated to inventory. Therefore, total costs charged to profit and loss account is different

3. CVP analysis is more used for decision making. Traditional income statement is typically used for financial reporting purposes

Above table contains an eample with numbers. For any further clarifications, please comment and you will surely get a response.