Question

WEEK 4: CVP ANALYSIS

Please identify the similarities and differences between the CVP income statement and the traditional income statement that we examined in prior weeks.

Answer 1

Differences between Traditional Income Statement & CVP Income Statement Format is as folows:

a) Under Traditional method the cost is bifurcated into product cost & period cost and both are deducted from Revenue to arrive at the profit whereas in CVP Format cost is bifurcated into Variable Cost & Fixed cost and both are deducted from Revenue to arrive at the profit;

b) Traditional Income Statement is more preferable for the analysis by External parties like Bank, Creditors, Debtors etc, whereas CVP Income Statement is useful for Internal analysis from Cost point of view of resources;

c) Traditional Income Statement uses Absorption Costing whereas CVP Income statement uses Variable Costing to for the expenses/cost incurred;

As a CFO of the company these calculations under CVP income statement method would be used to identify the cost of making the product, to understand the requirement of the resources, to analyse different ratios and to find out the avenues to reduce cost or to increase profit;

Following example can be helpful to understand the use of CVP income Statement for internal reporting:

Below statement shows the position of two different segments of a business; Although both the segments have equal amount of Profit the costing for both is different; A has higher Fixed cost as compared to B;

Also, this information can be used to find out Contribution margin ratio, break even point , Margin of Safety, Expense ratio etc

Cost-volume-profit income statement

	A (in $)	B (in $)
Revenue	7,000	8,000
Variable expenses	3,100	5,500
Contribution margin	3,900	2,500
Fixed expenses	2,250	850
Net income	1,650	1,650

Regards,