Cost-Volume-Profit Analysis

Cost-Volume-profit (CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions.

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 (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis.

Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are:

The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant.

The components of Cost-Volume-Profit Analysis are:

Level or volume of activity
Unit Selling Prices
Variable cost per unit
Total fixed costs
Sales mix

Management accounting tasks/ services provided

Listed below are the primary tasks/ services performed by management accountants. The degree of complexity relative to these activities are dependent on the experience level and abilities of any one individual.

Rate & Volume Analysis
Business Metrics Development
Price Modeling
Product Profitability
Geographic vs. Industry or Client Segment Reporting
Sales Management Scorecards
Cost Analysis
Cost Benefit Analysis
Cost-Volume-Profit Analysis
Life cycle cost analysis
Client Profitability Analysis
IT Cost Transparency
Capital Budgeting
Buy vs. Lease Analysis
Strategic Planning
Strategic Management Advise
Internal Financial Presentation and Communication
Sales and Financial Forecasting
Annual Budgeting
Cost Allocation