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C V P Analysis

CVP (Cost-Volume-Profit) analysis is a management accounting tool that expresses the relationship between sales volume, costs, and profit. It can be used to forecast profits accurately, determine pricing decisions, and simplify computations like break-even analysis. The main assumptions of CVP are constant prices and costs, everything produced is sold, and costs are only affected by changes in activity. Limitations include that it is a short-run analysis and assumes perfect conditions.

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151 views8 pages

C V P Analysis

CVP (Cost-Volume-Profit) analysis is a management accounting tool that expresses the relationship between sales volume, costs, and profit. It can be used to forecast profits accurately, determine pricing decisions, and simplify computations like break-even analysis. The main assumptions of CVP are constant prices and costs, everything produced is sold, and costs are only affected by changes in activity. Limitations include that it is a short-run analysis and assumes perfect conditions.

Uploaded by

Dinesh Pant
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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CVP ANALYSIS

MEANING
CVP

stands for Cost-Volume-Profit CVP analysis is a management accounting tool that expresses the relationship between sales volume, cost and profit. CVP can be used in the form of graph or an equation. Profit = Sales Variable cost Fixed Cost

Source : http://www.cliffsnotes.com/WileyCDA/CliffsReviewTopic/CostVolume-Profit-Analysis.html

TOOLS
The main tools used for a CVP analysis are Break even analysis, represents the level of sales where net income equals zero Contribution margin analysis, represents the amount of income or profit the company made before deducting its fixed costs Operating leverage, represents the degree to which a business uses fixed costs to generate profit

USES AND ADVANTAGES


By studying the relationships of costs, sales, and net income, management is able to cope with many planning decisions Forecast profits accurately In determining the pricing decisions that should be made for the product CVP simplifies the computation of breakeven in break even analysis, Margin of Safety and more generally allows simple computation of Target Income Sales.

ASSUMPTIONS
Constant sales price Constant variable cost per unit Constant total fixed cost Everything produced is sold Costs are only affected because activity changes If a company sells more than one product, they are sold in the same mix

LIMITATIONS
CVP is a short run, marginal analysis In the long run all costs are variable Assumption that everything produced is sold

REFERENCE

http://www.toolkit.com/small_business_guide www.cliffsnotes.com http://www.accountingformanagement.com/cost_volum Accounting handbook by Joel G. Siegel, Jae K. Shim Cost Management: Measuring Monitoring And Motivating Performance by Eldenburg

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