Applications of Cost-Volume Profit (CVP) Analysis

CVP relationships information which is useful to managers in a wide variety of planning decisions. Managers use this analytical technique to accomplish far more than just the determination of a break-even point. Example The following problems are based on the information given for company X: S.P (Sales Price) per unit = $25 Variable Cost per … Read more

Assumptions and Limitations underlying CVP Analysis

The assumptions imposed by accountants in calculating the C VP ratios also serve as the possible limitations of the technique. Most CVP analyses are based on the concept of static cost. All costs can be classified into two categories: fixed costs and variable costs. This assumption is not always true because certain costs like depreciation … Read more

Margin of Safety

Margin of Safety (MOS) Definition The difference between the actual sales volume. and the break-even sales volume is called the margin of safety. It represents that proportion of the current sale which determines the profit of the firm. Formula to calculate the Margin of Safety Margin of Safety = Actual sales volume – Break-even sales … Read more

Graphical representation of break-even analysis

Break-even chart Cost-Volume-Profit (or Break-Even) relationships can also be portrayed through the use of graphs. This method has the advantage of showing cost-volume-profit relationships over a range of sales. The graphic analysis permits managers to observe areas of profit or loss that would occur for a broad range of sales activity. The data from the … Read more

Contribution Margin

What is the Contribution Margin? The contribution margin (C.M.) is the amount of revenue in excess of variable costs. To cover the company’s fixed cost, this portion of the revenue is available. And after all fixed costs have been covered, this provides an operating profit. Hence contribution is a profit measure, although an incomplete one, … Read more

Break-Even Point

Break-even Point – Definition The break-even point is that volume of activity at which total revenue equals the sum of all variable and fixed costs. The activity can be expressed in unit or in dollar sales. This break-even is the point at which there is no profit or loss. Break-even Point is a point where … Read more

What is cost volume profit (CVP) 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 can also be used to analyze the effects on profit of changes in selling prices, costs, income tax rates and the organization’s mix of products or services. Explanation … Read more

Contribution margin ratio

Definition of Contribution Margin Ratio The total contribution margin divided by the total sales is equal to Contribution margin ratio. It is also known as the profit-volume ratio (p/v ratio). Explanation The Contribution Margin, as we know, is the amount of revenue in excess of variable costs. Contribution margin may be expressed on per unit basis … Read more

Difference between actual costing and normal costing

Normal Costing: Normal costing refers to a product costing system where actual direct material, actual direct labor and applied manufacturing overhead costs are added to work in process inventory. Actual Costing: Actuar costing system refers to a product costing system where actual direct material and actual direct labor and actual manufacturing overhead costs are added … Read more