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:
| 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.
| 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.
| 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:
| 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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.