The relationship between cost volume and profit is shown by cost-volume-profit analysis. it is an analytical tool for analyzing the relationship among cost, price, profit, sales and production volume. Mainly there are three element in cost-volume-profit analysis.
It is highly essential for the management to have the complete knowledge about the inter relationship among the cost, volume and profit. for this purpose cost-volume-profit analysis can be regarded as a sophisticated method or analytical tool used in management.
Cost-volume-profit (CVP) analysis is one of the most powerful tools that managers at their command. It helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on interaction among the following five elements; 1. prices of products
2. volume or level of activity
3. per unit variable costs
4. total fixed costs
5. mix of products sold
Because CVP analysis helps managers understand the interrelationships among cost, volume, and profit, it is vital tool in many business decisions. These decisions include, for example; a. what products to manufacture or sell
b. what pricing policy to follow
c. what marketing strategy to employ, and
d. what type of productive facilities to acquire
B. Marginal and absorption costing: different rationales.
Absorption costing stems from the view that certain necessarily incurred to allow output to occur and should therefore be included in unit costs. In effect, absorption costing is based on a functional classification of costs; that is all out put related (or production costs are attributed to cost units, with non production costs being excluded from unit costs (at least for stock valuation and profit measurement purposes). Marginal costing, however, is based on a distinction between variable and fixed costs, with the absorption costing being attributed to cost units and the marginal costing being dealt with...
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