Cost Volume

In: Business and Management

Submitted By Vidyastha
Words 1945
Pages 8
Cost-Volume-Profit (CVP) Analysis

The Cost Volume Profit Analysis of a company displays how the changes in cost and volume affect a company’s profit. This analysis helps accounting managers to determine the point where revenue breaks even with total cost.

Cost volume profit analysis let a manager explore the relationship between variable costs, fixed costs, the volume of units produced and profitability, due to which CVP analysis a vital tool in many business decisions. These decisions include:

1. What products and services to offer

2. What pricing policy to follow

3. What marketing strategy to employ

4. What basic cost structure to use

Five elements of CVP Analysis:

1. Prices of products

2. Volume or level of activity

3. Per unit variable costs

4. Total fixed costs

5. Mix of products sold

Assumptions Made with Cost Profit Analysis:

Accounting professionals in a business must make several assumptions concerning the components of cost volume profit analysis.

a. The first assumption is that the rise in cost and revenue only results from an increase in the number of units produced and not an increase in the selling price.

b. Another assumption made by a company is that costs are divided into two components: variable cost and fixed cost.

c. Managers also assume that costs and revenue are analyzed without taking into consideration the time value of money.

Contribution Margin

An element within cost volume profit analysis includes the contribution margin. Managers might think of contribution margin as the amount of profit made before the subtraction of fixed cost. As a company's total revenue increases, the contribution margin also increases.

| |
|Contribution Margin = Total Revenue -…...

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