cost volume profit analysis

Topics: Costs, Variable cost, Management accounting Pages: 10 (2968 words) Published: December 20, 2013
Question 2
Cost Volume Profit Analysis
1.0 Introduction
According to Jon Scheumann “a successful organizations need a culture that is attuned to cost management and pay attention to cost structure” From that statement manager must pay attention and carefully thinking when do decision making to the cost. For example when manager want to target the profit. They must take every cost that related in production such as variable cost and fix costs. Cost Volume profit analysis is used in decisions making in a company. The reasons why used cost volume profit analysis as a method to make decisions making because it helps manager to estimate future cost, revenue, expenses and profit that helps them to monitor the level of activity in production and monitor the plan. Besides that when used CVP analysis we can identify monitor the activity level and make analysis to avoid loss, find a target profit and maximize the production of unit. Moreover CVP analysis can help manager to identify the risk and effect for their decision making and a technique to analyse the profit change bases on sales volumes, costs, and process. When do CVP analysis the manager can get the information like the product that want to analyse

the volume is required to achieve a certain level of profit
total of revenue is needed before the company will incurred loss(break event point) Those fix cost can effects the organization to an unacceptable level of risk.

a) A break – even analysis must be interpreted in the light of the limitations of its underlying assumption …… (From Cost Accounting: A managerial Emphasis, by C.T. Horngren)

2.0 Introduction to Assumption
What is assumption? Assumption is something like a rule is must be made or a certain item be ignore when do assumption in CVP analysis. Why need to do assumption in CVP analysis? There is a limitation of CVP analysis. The effectiveness of CVP analysis must be done with assumption in order to make CVP analysis is useful when the manager do decision making for the future plan. How to make the assumption? It to simplify the cost that hard to calculate and that cost behaviour is always changes. So when do the assumption we can solve it faster at any of period of times and situations. In order to make assumption we must to understand that every assumption is made that no has too much cost, long period, break a law and company policies. Normally when did the new assumption people hard to accept and need time to convince them. After we done with assumption for CVP analysis, we should listing all assumption to make other analysis. If assumption is made is violating, the CVP analysis is can easily modified and make it realistic. What use of assumption? To simplify a complex analysis more easily and to set up some condition and control it when do an analysis. Sometime when we do assume there a risk we must to be taken and face it like hidden cost, increasing in petrol cost and tax.

3.0 Assumption
To used assumption in CVP analysis the manager must recognize the cost first. For example when do CVP analysis, we must identify sales volume, cost, and profit. So when identify the cost there are condition must be made to make the assumption 1. All cost included variable and fixed cost

Why we assume that variable cost and fixed cost included all cost? Because in the firm, we are cannot identify each type element of cost. Besides that firm cannot identify which element of cost should be fixed or variable cost. If the firm cannot identify Fixed and variable cost, it impossible to used cost volume profit analysis. For example if the firm cannot identify fix and variable cost there will be a problem when do CVP analysis. There are a way how to identify which costs are fixed and variable cost. Every cost that related in production and always changes base on the volume of the unit produce is variable cost. Example cost of material and labour to produce item in production. For fix cost is the cost...
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