Cvp Analysis
CHAPTER 1: COST VOLUME PROFIT ANALYSIS
LEARNING OBJECTIVES:
At the end of this chapter, you should be able to: * Describe the differences between the accountant’s and the economist’s model of cost volume profit analysis. * Apply the cost volume profit approaches in the calculation of breakeven point, margin of safety, target selling price and sales volume. * Construct breakeven, contribution and profit volume graph. * Apply cost volume profit analysis in a multi product setting * Identify and explain the assumptions and limitations of cost volume profit analysis.
INTRODUCTION
CVP Analysis is a method of examining the relationship between changes in activity (i.e. output) and changes in total sales revenue, expenses and net profit. It is used as a tool for decision making. CIMA’s Official Terminology defined CVP analysis as “the study of the effects on the future profit of changes in fixed cost, variable cost, sales price, quantity and mix”.
A break-even analysis is a more commonly used term but it is often mislead as being synonym to the cost volume profit analysis. In fact, cost volume profit analysis provides much greater significance than break-even analysis.
DIFFERENCES BETWEEN CVP AND BREAKEVEN ANALYSIS
BREAKEVEN ANALYSIS * To calculate break-even point. * BEP: the point where total revenues equal total costs. * At this point, the revenues would have covered all fixed costs and variable costs incurred. * This point represents the minimum sales volume that should be achieved by organization to avoid losses. CVP ANALYSIS * Assists the management in planning and decision making. * It will be used to answer various questions such as: * How many units must be sold to break-even? * How many units must be sold to achieve a target profit of RM1,000,000 per year? * What is the effect on profit if the selling price decreased by RM5 per unit and sales volume increased to 500,000 units? * What is the impact on
LEARNING OBJECTIVES:
At the end of this chapter, you should be able to: * Describe the differences between the accountant’s and the economist’s model of cost volume profit analysis. * Apply the cost volume profit approaches in the calculation of breakeven point, margin of safety, target selling price and sales volume. * Construct breakeven, contribution and profit volume graph. * Apply cost volume profit analysis in a multi product setting * Identify and explain the assumptions and limitations of cost volume profit analysis.
INTRODUCTION
CVP Analysis is a method of examining the relationship between changes in activity (i.e. output) and changes in total sales revenue, expenses and net profit. It is used as a tool for decision making. CIMA’s Official Terminology defined CVP analysis as “the study of the effects on the future profit of changes in fixed cost, variable cost, sales price, quantity and mix”.
A break-even analysis is a more commonly used term but it is often mislead as being synonym to the cost volume profit analysis. In fact, cost volume profit analysis provides much greater significance than break-even analysis.
DIFFERENCES BETWEEN CVP AND BREAKEVEN ANALYSIS
BREAKEVEN ANALYSIS * To calculate break-even point. * BEP: the point where total revenues equal total costs. * At this point, the revenues would have covered all fixed costs and variable costs incurred. * This point represents the minimum sales volume that should be achieved by organization to avoid losses. CVP ANALYSIS * Assists the management in planning and decision making. * It will be used to answer various questions such as: * How many units must be sold to break-even? * How many units must be sold to achieve a target profit of RM1,000,000 per year? * What is the effect on profit if the selling price decreased by RM5 per unit and sales volume increased to 500,000 units? * What is the impact on