CVP Income Statement

CVP Income Statement Format

A CVP or cost-volume-profit income statement has the same information as a more traditional income statement, but is designed to show the effects of changes in costs and volume on the profit of a business. It is used as a tool to allow management to make decisions about such things as product mix, selling prices, and best use of production facilities.

The CVP income statement is for internal use only, and the exact format will depend on the business requirements. Typically, expenses are classified as either variable or fixed expenses, and totals are drawn to show contribution margin on a business and unit basis.

CVP Statement Example

A typical CVP income statement will have the following format:

Cost-volume-profit income statement
Total Unit
Revenue (500 units) 5,000 10.00
Variable expenses 2,000 4.00
Contribution margin 3,000 6.00
Fixed expenses 2,300
Net income 700

The following definitions are generally used in the CVP income statement:

Variable expenses

All variable expenses are included. Variable expenses are those which change in relation to the level of production output or revenue, these might include cost of goods sold, selling, and administration variable expenses.

Fixed expenses

Fixed expenses are those which do not vary with the level of production output or revenue, and again can include such items as cost of goods sold, selling, and administration variable expenses.

A more detailed CVP income statement might be produced along the following lines.

Detailed CVP income statement
Total Unit
Revenue (500 units) 5,000 10.00
Cost of goods sold 1,000 2.00
Selling expenses 600 1.20
Administration expenses 400 0.80
Variable expenses 2,000 4.00
Contribution margin 3,000 6.00
Cost of goods sold 800
Selling expenses 1,200
Administration expenses 300
Fixed expenses 2,300
Net income 700

Uses of the CVP Income Statement

The cost volume profit statement format has many uses allowing a business for instance to assess selling prices, changes in level of production output, and identifying the best product mix.

The information presented in the statement can be used to calculate additional information and ratios such as the contribution margin ratio, margin of safety, and break even point.

For example, consider two businesses A and B both having revenue of 6,000 and net income of 650.

Cost-volume-profit income statement
A B
Revenue 6,000 6,000
Variable expenses 2,100 4,500
Contribution margin 3,900 1,500
Fixed expenses 3,250 850
Net income 650 650

By presenting the information in the format of a CVP income statement, it is possible to analyse the differences between the two businesses. Although the net income is the same in both cases, business A has low variable expenses and high fixed expenses, whereas business B has high variable expenses and low fixed expenses.

The information from the CVP income statement can be used to produce the following:

Use of CVP income statement information
A B
Contribution margin ratio 65% 25%
Break even point 5,000 3,400
Margin of safety 1,000 2,600

Although the revenue and net income is the same for both businesses, the information in the CVP income statement can be used to show a very different picture about their operational capabilities.

CVP Income Statement November 6th, 2016Team

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