Cost-Volume-Profit Analysis: Definition

Cost-volume-profit (CVP) analysis is a technique used to determine the effects of changes in an organization’s sales volume on its costs, revenue, and profit.

CVP analysis is also used to analyze the effects on profit of various factors, namely:

  • Changes in selling prices
  • Costs
  • Income tax rates
  • Organization’s mix of products or services

Cost-Volume-Profit Analysis: Explanation

To profit is the first law of any business enterprise.

If profit isn’t there, the enterprise is liable to be eliminated. However, very few managers know about the profit structure in their own company or the basic elements that determine the profit structure.

Cost-volume-profit (CVP) analysis is an important tool that analyzes the interplay of various factors that affect profits.

CVP analysis shows the relationships among a business’s costs, volume, and profits. It is an important part of an organization’s budgeting activities.

CVP analysis is a tool used extensively in both the planning and control functions of an organization. An organization may use CVP analysis as a planning tool when the management wants to find out the desired profit when the sales volume is known.

Alternatively, the management may begin with a target profit and then work out the level of sales needed to reach that profit level.

As a control technique, CVP analysis is used to measure the performance of the different departments in a company.

A basic application of CVP analysis is break-even analysis. Break-even analysis is concerned with determining the sales volume at which total revenue equals total costs so that profits are seen.

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Frequently Asked Questions

What is a break-even analysis?

Break-even analysis is concerned with determining the sales volume at which total revenue equals total costs so that profits are seen.

What is a cost-volume-profit analysis?

Cost-volume-profit (CVP) analysis is a technique used to determine the effects of changes in an organization’s sales volume on its costs, revenue, and profit.

What is the difference between a cost-volume-profit analysis and a break-even analysis?

CVP analysis is concerned with how costs, volume, and profit are related to one another. Break-even analysis is concerned simply with determining whether or not a business will show a profit on any given sales level.

What are the different parts of a cost-volume-profit analysis?

The five sections in CVP analysis are: 1) costs, 2) volume, 3) profit, 4) Contribution Margin, and 5) break-even point.

What is profit?

Profit is the residual amount after all revenues have been accounted for and all costs have been paid.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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