Question

A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision making than the traditional income statement that is prepared for external users.

Answer 1

The features that make the CVP income statement more useful for the management decision making than the traditional income statement can be summaried as follows:

1.Bifurcation of Variable cost and Fixed cost: Management gets to know what are the variable cost associated with the production and that they changes with the production. Fixed cost also gets reflected.

2. Contribution margin: management gets to know how much sales revenues a company or product is generating over its Variable cost.

3. Contribution margin ratio can be calculated and compared.

4. Allows management to calculated Break Even Point in Units and in Sales Dollar by dividing Fixed Costs by Contribution margin per unit (or Contribution margin ratio)

5. Helps in calculating Margin of Safety Sales which is the excess of Sales revenues over Break Even Sales revenues.