Cost Volume Profit Analysis

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Definition of Cost Accounting

A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment.

Definition of Cost-Volume Profit Analysis

A method of cost accounting used in managerial economics. Cost-volume profit analysis is based upon determining the breakeven point of cost and volume of goods. It can be useful for managers making short-term economic decisions, and also for general educational purposes.

AND Cost-volume profit analysis makes several assumptions in order to be relevant. It often assumes that the sales price, fixed costs and variable cost per unit are constant. Running this analysis involves using several equations using price, cost and other variables and plotting them out on an economic graph.

The assumptions underlying CVP analysis are:

The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.

CVP assumes the following:

Constant sales price;
Constant variable cost per unit;
Constant total fixed cost;
Constant sales mix;
Units sold equal units produced.

The components of CVP analysis are:

Level or volume of activity
Unit selling prices
Variable cost per unit
Total fixed costs
Sales mix

One of the main methods of calculating CVP is profit–volume ratio: which is (contribution /sales)*100 = this gives us profit–volume ratio. contribution stands...
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