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cost volume profit analysis

Post by bhupendra.hada on Tue Dec 27, 2016 4:14 pm

What is the relevance of CVP analysis for an organisation

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Re: cost volume profit analysis

Post by prerna khandelwal on Thu Dec 29, 2016 10:30 pm

Many companies and accounting professionals use cost-volume-profit analysis to make informed decisions about the products or services they sell. In this regard, CVP analysis plays a larger role in managerial accounting than in financing accounting. Managerial accounting focuses on helping managers -- or those tasked with running businesses -- make smart, cost-effective moves. Financial accounting, by contrast, focuses more on painting an economic picture of a company so that outside parties, such as banks or investors, can determine how financially healthy it is.

CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company.

CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.The most profitable combination of variable cost, fixed cost, selling price and sales volume can be found with the help of cost volume profit analysis. If fixed costs can be reduced by a greater amount, the profits can sometimes be increased by reducing the contribution margin.

More commonly, however, we have seen that the way to improve profits is to increase the total contribution margin figure, Sometimes this can be done by reducing the fixed costs (such as advertising) and thereby increasing volume; and some times it can be done by trading off variable and fixed costs with appropriate changes in volume. Many other combinations of factors are possible.

The size of the unit contribution margin (and the size of the contribution margin ratio - CM ratio) is very important. For example, the greater the unit contribution margin, the greater is the amount that a company will be willing to spend to increase unit sales. This explains in part why companies with high unit contribution margin (such as auto manufacturers) advertise so heavily, while companies with low unit contribution margin (such as dishware manufacturers) tend to spend much less for advertising.

In short, the effect on the contribution margin holds the key to many decision.

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Re: cost volume profit analysis

Post by ashi gupta on Thu Dec 29, 2016 11:06 pm

Cost-volume-profit analysis is a tool that can be utilized by business managers to make better business decisions. Among the tools in a business manager's decision-making arsenal, CVP analysis provides one of the more detailed and objective ways by which a manager can assess and even predict the course of business for the company and its employees
CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company. For instance, when a manager knows the breakeven point, he can tweak spending and increase production efforts to increase profitability. Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.

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Re: cost volume profit analysis

Post by Karishma kedia on Thu Dec 29, 2016 11:08 pm

The relevance of CVP Analysis for an organization are:
 
1.      CVP analysis determines the levels of sales to be achieved to meet their targeted profit. The managers the will prepare the budgets consist of the costs and the expected revenues at any level of production.
2.      CVP analysis helps in evaluating the effects of cost volume changes, in order to review expected profit because certain costs incurred.
3.      In business, organisations   always face a lot of combination of elements to be considered for sales and sometimes it is confusing. This profit planning feature from CVP analysis can be used to assist in finding the most profitable combination between selling price, cost and volume, which makes calculations of expected profit at different sales levels in easier way. Also, managers can measure the break-even point and the margin of safety assessment.
4.      In business there are some problem emerged, such as product selection mix, make or buy decisions, selection of the best channel of distribution or the type of marketing strategy to use which will require manager to choose the best option  for solving the problem. This analysis will be the vital tool for decision making process to increase profitability.

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Re: cost volume profit analysis

Post by prakhar.gupta on Fri Dec 30, 2016 10:10 am

Cost-volume-profit analysis, or CVP, is something companies use to figure out how changes in costs and volume affect their operating expenses and net income. CVP works by comparing different relationships, such as the cost of operating and producing goods, the amount of goods sold, and profits generated from the sale of those goods. By breaking down costs into fixed versus variable, CVP analysis gives companies strong insight into the profitability of their products or services.

Uses of CVP analysis:-
Many companies and accounting professionals use cost-volume-profit analysis to make informed decisions about the products or services they sell. In this regard, CVP analysis plays a larger role in managerial accounting than in financing accounting. Managerial accounting focuses on helping managers -- or those tasked with running businesses -- make smart, cost-effective moves. Financial accounting, by contrast, focuses more on painting an economic picture of a company so that outside parties, such as banks or investors, can determine how financially healthy it is.

Assumptions when using CVP analysis:-
When managers use CVP analysis to make business decisions, the following assumptions are made:
• All costs, including manufacturing, administrative, and overhead costs, can be accurately identified as either fixed or variable.
• The selling price per unit is constant.
• Changes in activity are the only factors that affect costs.
• All units produced are sold.

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Re: cost volume profit analysis

Post by Krishna Dhoot on Fri Dec 30, 2016 10:29 am

A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss.

Importance and relevance of CVP in Organisation
The most profitable combination of variable cost, fixed cost, selling price and sales volume can be found with the help of cost volume profit analysis. If fixed costs can be reduced by a greater amount, the profits can sometimes be increased by reducing the contribution margin. We have seen that the way to improve profits is to increase the total contribution margin figure, Sometimes this can be done by reducing the fixed costs (such as advertising) and thereby increasing volume; and some times it can be done by trading off variable and fixed costs with appropriate changes in volume. Many other combinations of factors are possible.
CVP analysis, or cost-volume-profit analysis, serves as a valuable tool for managers. CVP analysis provides a simple system of calculations that managers use to estimate the financial effects of a broad range of decisions. In doing so, CVP compares the relationship between costs of producing goods, volume of goods sold and profits. Because CVP is a simple system, it simplifies the situations it analyses. This means it makes assumptions about those situations. CVP assumes a constant sales price per unit, constant variable costs per unit and constant total fixed costs, for instance. In addition, CVP assumes that all goods sell.Managers frequently use CVP to estimate the level of sales that will allow the company to make a particular profit, called targeted income.Using CVP, managers can also estimate how changes in the costs of their products or volume of products affect the company's profits.

To use CVP analysis, managers must know how to calculate the contribution margin, contribution margin ratio and break-even point. Managers must conduct a more thorough analysis of the options that seem best, because CVP simplifies the business environment.

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Re: cost volume profit analysis

Post by maharwal.vartika on Fri Dec 30, 2016 10:44 am

Cost-Volume-Profit [CVP] analysis is an analytical tool for studying the relationship between volume, cost, prices, and profits. It is very much an extension, or even a part of marginal costing. It is an integral part of the profit planning process of the firm.
The CVP analysis is very much useful to management as it provides an insight into the effects and inter-relationship of factors, which influence the profits of the firm. The relationship between cost, volume and profit makes up the profit structure of an enterprise. Hence, the CVP relationship becomes essential for budgeting and profit planning.As a starting point in profit planning, it helps to determine the maximum sales volume to avoid losses, and the sales volume at which the profit goal of the firm will be achieved. As an ultimate objective it helps management to find the most profitable combination of costs and volume.
A dynamic management, therefore, uses CVP analysis to predict and evaluate the implications of its short run decisions about fixed costs, marginal costs, sales volume and selling price for its profit plans on a continuous basis.

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Re: cost volume profit analysis

Post by Sheenajain on Fri Dec 30, 2016 12:32 pm


Cost-volume-profit analysis, or CVP, is something companies use to figure out how changes in costs and volume affect their operating expenses and net income. CVP works by comparing different relationships, such as the cost of operating and producing goods, the amount of goods sold, and profits generated from the sale of those goods. By breaking down costs into fixed versus variable, CVP analysis gives companies strong insight into the profitability of their products or services.
The most profitable combination of variable cost, fixed cost, selling price and sales volume can be found with the help of cost volume profit analysis. If fixed costs can be reduced by a greater amount, the profits can sometimes be increased by reducing the contribution margin.
Many companies and accounting professionals use cost-volume-profit analysis to make informed decisions about the products or services they sell. In this regard, CVP analysis plays a larger role in managerial accounting than in financing accounting. Managerial accounting focuses on helping managers -- or those tasked with running businesses -- make smart, cost-effective moves. Financial accounting, by contrast, focuses more on painting an economic picture of a company so that outside parties, such as banks or investors, can determine how financially healthy it is.

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Re: cost volume profit analysis

Post by Aarya Gupta on Fri Dec 30, 2016 1:02 pm

A part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis.
The most profitable combination of variable cost, fixed cost, selling price and sales volume can be found with the help of cost volume profit analysis. If fixed costs can be reduced by a greater amount, the profits can sometimes be increased by reducing the contribution margin.

More commonly, however, we have seen that the way to improve profits is to increase the total contribution margin figure, Sometimes this can be done by reducing the fixed costs (such as advertising) and thereby increasing volume; and some times it can be done by trading off variable and fixed costs with appropriate changes in volume. Many other combinations of factors are possible.

The size of the unit contribution margin (and the size of the contribution margin ratio - CM ratio) is very important. For example, the greater the unit contribution margin, the greater is the amount that a company will be willing to spend to increase unit sales. This explains in part why companies with high unit contribution margin (such as auto manufacturers) advertise so heavily, while companies with low unit contribution margin (such as dishware manufacturers) tend to spend much less for advertising.

Thus, the effect on the contribution margin is very important.

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Re: cost volume profit analysis

Post by Megha Nagelia on Fri Dec 30, 2016 2:13 pm

The most profitable combination of variable cost, fixed cost, selling price and sales volume can be found with the help of cost volume profit analysis. If fixed costs can be reduced by a greater amount, the profits can sometimes be increased by reducing the contribution margin.

More commonly, however, we have seen that the way to improve profits is to increase the total contribution margin figure, Sometimes this can be done by reducing the fixed costs (such as advertising) and thereby increasing volume; and some times it can be done by trading off variable and fixed costs with appropriate changes in volume. Many other combinations of factors are possible.
1) Decision-Making
CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company. For instance, when a manager knows the breakeven point, he can tweak spending and increase production efforts to increase profitability. Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.

2)Detail
Another major benefit of CVP analysis is that it provides a detailed snapshot of company activity. This includes everything from the costs needed to produce a product to the amount of the product produced. This helps managers determine, very specifically, what the future will hold if variables are altered. For instance, transportation expenses and costs for materials can change. These variable costs can affect the bottom line. CVP analysis allows the manager to plug in variable costs to establish an idea of future performance, within a range of possibilities.

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Re: cost volume profit analysis

Post by AYUSHI MISHRA on Fri Dec 30, 2016 2:57 pm

Cost-volume-profit analysis, is something companies use to figure out how changes in costs and volume affect their operating expenses and net income.

USE OF CVP ANALYSIS

Many companies and accounting professionals use cost-volume-profit analysis to make informed decisions about the products or services they sell. In this regard, CVP analysis plays a larger role in managerial accounting than in financing accounting. Managerial accounting focuses on helping managers -- or those tasked with running businesses -- make smart, cost-effective moves. Financial accounting, by contrast, focuses more on painting an economic picture of a company so that outside parties, such as banks or investors, can determine how financially healthy it is.

Elements of CVP analysis

The three elements involved in CVP analysis are:
Cost, which means the expenses involved in producing or selling a product or service.
Volume, which means the number of units produced in the case of a physical product, or the amount of service sold.
Profit, which means the difference between the selling price of a product or service minus the cost to produce or provide it.

Assumptions when using CVP analysis

When managers use CVP analysis to make business decisions, the following assumptions are made:

All costs, including manufacturing, administrative, and overhead costs, can be accurately identified as either fixed or variable.
The selling price per unit is constant.
Changes in activity are the only factors that affect costs.
All units produced are sold.

Contribution margin
CVP analysis can help companies determine their contribution margin, which is the amount remaining from sales revenue after all variable expenses have been deducted. The amount that remains is first used to cover fixed costs, and whatever remains afterward is considered profit.
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Re: cost volume profit analysis

Post by sbagla21 on Fri Dec 30, 2016 3:24 pm

Cost-volume-profit (CVP) analysis is used to determine how changes in costs andvolume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including: Sales price per unit is constant. Variable costs per unit are constant. Total fixed costs are constant
 
 
CVP analysis has following assumptions:

  1. All cost can be categorized as variable or fixed.
  2. Sales price per unit, variable cost per unit and total fixed cost are constant.
  3. All units produced are sold.

Where the problem involves mixed costs, they must be split into their fixed and variable component by High-Low Method, Scatter Plot Method or Regression Method.
 
CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company. For instance, when a manager knows the breakeven point, he can tweak spending and increase production efforts to increase profitability. Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.
 
The CVP approach to analysis is beneficial, but it is limited in the amount of information it can provide in a multi-product operation. Much of the analysis that is done by business managers who use this approach is done based on a single product. Northern Arizona University notes that multi-product businesses, such as restaurants, can have a difficult time with CVP analysis because menu items, for instance, are likely to have many variable cost ratios. This makes the challenge of CVP analysis all the more difficult because it must be done for each specific product.
 
CVP Analysis Formula
 
The basic formula used in CVP Analysis is derived from profit equation:
px = vx +FC + profit
In the above formula,
   p is price per unit;
   v is variable cost per unit;
   x are total number of units produced and sold; and
   FC is total fixed cost

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Re: cost volume profit analysis

Post by SHWETA KHANDAL on Fri Dec 30, 2016 7:09 pm

Cost-volume-profit analysis ,a CVP ,is something companies use to figure out how charges in costs and volume affect their operating expenses and net income.CVP analysis gives companies strong insight into the profitability of their products a services.Many companies and accounting professionals use cost-volume-profit analysis to make informed decisions about the products or services they sell.In this regard ,CVP analysis plays a larger role in managerial accounting than in financing accounting.

Managerial accounting focuses on helping managers-or those tasked with running businesses-make smart,cost effective moves.Financial accounting,by contrast ,focuses more on painting an economic picture of a company so that outside parties,such as banks or investors,can determine how financially healthy it is.The three elements involved in CVP analysis are- 1) Cost which means the expenses involved in producing or selling a product or service. 2) Volume,which means the number of units produced in the case of a physical product,or the amount of service sold 3) Profit ,which means the difference between the selling price of a product or service minus the costs to produce or provide it.

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Re: cost volume profit analysis

Post by yashica arora on Fri Dec 30, 2016 7:19 pm

Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. Every firm has a prime motive of not only earning profit but also maximizing it. A profit does not happen by chance. It has to be managed. Cost-volume-profit analysis is a tool of planning for profit. It is helpful for developing alternative strategies in sales planning and cost estimation. Managers can use the concept of cost-volume-profit analysis to forecast volume of activity at which the firm will break-even or attain target profits. CVP analysis is therefore, a useful tool that helps managers, business owners and entrepreneurs to determine the profit potential of a new firm or the impact on profit due to changes in selling price, cost or level of activities of current business. By breaking down costs into fixed versus variable, CVP analysis gives companies strong insight into the profitability of their products or services. Cost-volume-profit analysis is a simple but flexible tool for exploring potential profit based on cost strategies and pricing decisions. Even entities without a profit goal find CVP useful. Governmental agencies use the analysis to determine the level of service appropriate for projected revenues. Non profit agencies, increasingly stipulating fees for service, can explore fee-pricing options; in many cases, the recipients are especially price-sensitive due to income or health concerns. The agency can use CVP to explore the options for efficient allocation of resources.

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Re: cost volume profit analysis

Post by ankitsharma on Fri Dec 30, 2016 7:27 pm

Yes, The cost-volume-profit is a necessary tool for forecasting also for management control of an organisation . The method includes a number of techniques and methods of solving problems based on understanding patterns of evolution characteristics of business costs. The techniques express the relationship between incomes, sales structure, costs, production volume and profits and include break-even analysis and profit forecasting processes. This relationship provides a general model of economic activity, which management can use to short-term forecasts for business performance evaluation and analysis of decision alternatives.
The marginal contribution is the difference between total revenue and totals variable costs and explains how changes the operating profit as changing the number of units sold. Can be calculated thus:
Marginal contribution = Marginal contribution per unit * Number of units sold
Marginal contribution per unit = Selling price - Unit variable cost


Marginal contribution can be expressed as a percentage, called the marginal contribution rate, being equal to the ratio of the marginal contribution per unit and selling price. The break-even is the amount of production sold for that total revenues equal total costs. This indicator tells managers how much the minimum production must sell for no loss.

CVP Analysis Formula

The basic formula used in CVP Analysis is derived from profit equation:
px = vx +FC + profit
In the above formula,
  p is price per unit;
  v is variable cost per unit;
  x are total number of units produced and sold; and
  FC is total fixed cost

The cost-volume-profit analysis is useful only in certain circumstances and only when certain assumptions are valid:
• revenue and cost changes resulting solely due to changes in the number of units of goods or services produced and sold;
• total costs can be decomposed into a fixed component that does not vary with production volume and a component which varies with the size of production;
• developments in total revenues and total costs are linear in relation to volume production within a relevant period;
• selling price, unit variable cost and fixed costs are known and constant within a relevant period;
• analysis refer either to a single product, being assumed that the proportion of different products in total will remain constant as change in the total number of units sold;
• all revenues and costs can be aggregated and compared without taking into account the time value of money.

If one or more of these assumptions are lacking, the cost-volume-profit analysis may give wrong results. In sum, cost-volume-profit model is useful because it provides an overview of business management. In order to forecast, management can use the cost-volume-profit analysis for profit calculation for a given volume of sales or settle the sales to the level necessary in order to achieve planned profits. In addition, cost-volume-profit analysis is used increasingly in the budget process.

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Re: cost volume profit analysis

Post by manish rajpal on Fri Dec 30, 2016 7:29 pm

Cost-volume-profit analysis, or CVP, is something companies use to figure out how changes in costs and volume affect their operating expenses and net income. CVP works by comparing different relationships, such as the cost of operating and producing goods, the amount of goods sold, and profits generated from the sale of those goods. By breaking down costs into fixed versus variable, CVP analysis gives companies strong insight into the profitability of their products or services. Among the tools in a business manager's decision-making arsenal, CVP analysis provides one of the more detailed and objective ways by which a manager can assess and even predict the course of business for the company and its employees
CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company. For instance, when a manager knows the breakeven point, he can tweak spending and increase production efforts to increase profitability. Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.

CVP analysis has following assumptions:
All cost can be categorized as variable or fixed.
Sales price per unit, variable cost per unit and total fixed cost are constant.
All units produced are sold.

Where the problem involves mixed costs, they must be split into their fixed and variable component by High-Low Method, Scatter Plot Method or Regression Method.
 
CVP Analysis Formula

The basic formula used in CVP Analysis is derived from profit equation:
px = vx +FC + profit
In the above formula,
  p is price per unit;
  v is variable cost per unit;
  x are total number of units produced and sold; and
  FC is total fixed cost

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Re: cost volume profit analysis

Post by Ravi Sharma on Fri Dec 30, 2016 7:55 pm

Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including: Sales price per unit is constant.
Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. Every firm has a prime motive of not only earning profit but also maximizing it. A profit does not happen by chance. It has to be managed. Cost-volume-profit analysis is a tool of planning for profit. It is helpful for developing alternative strategies in sales planning and cost estimation. Managers can use the concept of cost-volume-profit analysis to forecast volume of activity at which the firm will break-even or attain target profits. CVP analysis is therefore, a useful tool that helps managers, business owners and entrepreneurs to determine the profit potential of a new firm or the impact on profit due to changes in selling price, cost or level of activities of current business.

CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company. For instance, when a manager knows the breakeven point, he can tweak spending and increase production efforts to increase profitability. Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.

The basic formula used in CVP Analysis is derived from profit equation:
px = vx +FC + profit
In the above formula,
 p is price per unit;
 v is variable cost per unit;
 x are total number of units produced and sold; and
 FC is total fixed cost

CVP analysis has following assumptions:
• All cost can be categorized as variable or fixed.
• Sales price per unit, variable cost per unit and total fixed cost are constant.
• All units produced are sold.

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Re: cost volume profit analysis

Post by mayank khatri on Fri Dec 30, 2016 8:39 pm

Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point ), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analyses.
Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:
1. The behaviour of both costs and revenues in linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.)
2. Costs can be classified accurately as either fixed or variable.
3. Changes in activity are the only factors that affect costs.
4. All units produced are sold (there is no ending finished goods inventory).
5. When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.

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Re: cost volume profit analysis

Post by rakshita jain on Fri Dec 30, 2016 10:32 pm

CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis and helps the manager in decision making process.Cost-volume-profit analysis (CVP Analysis) is a tool of planning for profit.A dynamic management, therefore, uses CVP analysis to predict and evaluate the implications of its short run decisions about fixed costs, marginal costs, sales volume and selling price for its profit plans on a continuous basis.Managers frequently use CVP to estimate the level of sales that will allow the company to make a particular profit, called targeted incomeUsing CVP, managers can also estimate how changes in the costs of their products or volume of products affect the company's profits.

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Re: cost volume profit analysis

Post by sonakshi chadha on Fri Dec 30, 2016 11:09 pm

Cost-volume-profit analysis, or CVP, is something companies use to figure out how changes in costs and volume affect their operating expenses and net income. CVP works by comparing different relationships, such as the cost of operating and producing goods, the amount of goods sold, and profits generated from the sale of those goods. By breaking down costs into fixed versus variable, CVP analysis gives companies strong insight into the profitability of their products or services.
Uses of CVP analysis
Many companies and accounting professionals use cost-volume-profit analysis to make informed decisions about the products or services they sell. In this regard, CVP analysis plays a larger role in managerial accounting than in financing accounting. Managerial accounting focuses on helping managers -- or those tasked with running businesses -- make smart, cost-effective moves. Financial accounting, by contrast, focuses more on painting an economic picture of a company so that outside parties, such as banks or investors, can determine how financially healthy it is.
Elements of CVP analysis
The three elements involved in CVP analysis are:
1. Cost, which means the expenses involved in producing or selling a product or service.
2. Volume, which means the number of units produced in the case of a physical product, or the amount of service sold.
3. Profit, which means the difference between the selling price of a product or service minus the cost to produce or provide it.

Formula:
px = vx + FC + profit
p = price per unit
v = variable cost per unit
x = total number of units produced and sold
FC = total fixed cost


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Re: cost volume profit analysis

Post by Kiran Moolrajani on Fri Dec 30, 2016 11:13 pm

CVP Analysis is the most important aspect for every organization as it tells about the actual cost and profit whicj are incurred and tells the true pucture of an organization. The most profitable combination of variable cost, fixed cost, selling price and sales volume can be found with the help of cost volume profit analysis. If fixed costs can be reduced by a greater amount, the profits can sometimes be increased by reducing the contribution margin.

More commonly, however, we have seen that the way to improve profits is to increase the total contribution margin figure, Sometimes this can be done by reducing the fixed costs (such as advertising) and thereby increasing volume; and some times it can be done by trading off variable and fixed costs with appropriate changes in volume. Many other combinations of factors are possible.

The size of the unit contribution margin (and the size of the contribution margin ratio - CM ratio) is very important. For example, the greater the unit contribution margin, the greater is the amount that a company will be willing to spend to increase unit sales. This explains in part why companies with high unit contribution margin (such as auto manufacturers) advertise so heavily, while companies with low unit contribution margin (such as dishware manufacturers) tend to spend much less for advertising.

In short, the effect on the contribution margin holds the key to many decision.

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Re: cost volume profit analysis

Post by rohit.bharwani on Sat Dec 31, 2016 12:08 am

First of all let me explain what is CVP?
CVP(cost-volume-profit) is a method of cost accounting.As it is used to determine changes in cost and volume effects the sales of the organisation.

ELEMENTS OF CVP:-
1)Cost- Every business occurs certain costs initially,these costs are expenses which are made to produce goods or services.
2)Volume- It depends on the company how much they will produce or how much they will sell.
3)Profit- It is the key element of business as more profits are earned, company can manufacture more goods.

RELEVANCE:-

CVP analysis helps us to find contribution margin of the organisation.Contribution can be calculated as "Sales-Variable cost", the remaining amount is the contribution part.As a manager he has to take decisions regarding the problems occured like which thing is making the cost higher or lower,only manager has to take decisions to minimize the cost and earn greater profit for the organisation.cvp also helps in finding out the vaious cost like variable cost and fixed cost.The company contributes towards fixed cost to earn profit as much as they can.cvp analysis also helps in taking decisions effectively whether to buy product or not,either to continue or not,etc.cvp helps in computing break even sales.break even sales is the minimum point where the company is at no profit-no loss situation.we can calculate break even in RS and UNITS.

At last I would say that contribution margin is the only important element which helps in doing CVP analysis of any organisation.


Last edited by rohit.bharwani on Sat Dec 31, 2016 12:48 am; edited 1 time in total
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Re: cost volume profit analysis

Post by priyanka sharma on Sat Dec 31, 2016 12:16 am

CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis.
Every firm has a prime motive of not only earning profit but also maximizing it. A profit does not happen by chance. It has to be managed. Cost-volume-profit analysis (CVP Analysis) is a tool of planning for profit. CVP analysis is helpful for developing alternative strategies in sales planning and cost estimation. Certain relationship exists among the variables like selling price, sales volume and taxes. Cost-volume-profit analysis (CVP analysis) is an accounting technique showing the relationship among these variables. CVP analysis, though most often illustrates business cases, is equally applicable for not profit making organizations to allocate scarce economic resources most effectively among the competing alternatives. Allocation of scarce resources among the various demanding sectors is the most important issue of national planning.

CVP analysis is the analysis of the relationship between cost and volume of activities and the effect of the relationship on profit. Managers can use the concept of cost-volume-profit analysis to forecast volume of activity at which the firm will break-even or attain target profits. CVP analysis is therefore, a useful tool that helps managers, business owners and entrepreneurs to determine the profit potential of a new firm or the impact on profit due to changes in selling price, cost or level of activities of current business.

Costs-Volume Relationship

Costs show important behaviour in relation to the volume of activity such as:
* Total variable costs change in the same proportion and in the same direction as the volume by output change.
* Per unit variable costs remain fixed.
* Total fixed costs remain unchanged for the same period of time whatever is the level of output within the relevant range.

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Re: cost volume profit analysis

Post by nikita0831 on Sat Dec 31, 2016 2:15 am

Cost Volume Profit (CVP) analysis is used to determine how changes in cost and volume affect a company’s operating income and net income. In performing this analysis , there are several assumptions made , including sales price per unit is constant. Variable costs per unit are constant . total fixed cost are constant.

CVP analysis has following assumptions:
• All cost can be categorised as fixed as well as variable cost.
• Sales price per unit, variable cost per unit and fixed cost are constant.
• All units produced are sold.

The basic problem arises when semi variable cost is to differentiated between fixed cost and variable cost. But as CVP analysis is based on statistical models , decisions can be broken down into probabilities that help the decision making process.

The basic formula used in CVP Analysis is derived from profit equation:
Px = vx + FC + profit
In the above formula,
P is price per unit,
V is variable cost per unit,
X is total number of units produced and sold ; and
Fc is total fixed cost.

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Re: cost volume profit analysis

Post by Neha Choudhary on Sat Dec 31, 2016 12:16 pm

In all business enterprises, the implementation of cost volume profit analysis is very important and can never be over emphasized and to achieve this goal, target and objective, it is beckoned on the decision of managers. It helps to find out the responsiveness and relationship of cost volume profit analysis that could be positive or negative in business decisions.
In the study, a questionnaire was used to collect relevant data from the staff of Innoson technical Enugu, the findings revealed that Innoson technical Enugu has perception that the establishment of cost volume profit analysis has helped in the improvement of operational activities and in issues raised in the research work.
The study broadened the researcher’s depth of knowledge and the research embarked on review of related literature. Data drawn from secondary sources all contributed. Data generated was also presented on frequency table and analyzed clearly.
It was discovered at the end of the research work that most organizations are unable to achieve the organizations goal because of inability to apply the theory of cost volume profit analysis perfectly.
Finally, the application of cost volume profit analysis is more sensitive to management decision.

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Re: cost volume profit analysis

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