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 that accountants impose when calculating CVP ratios are sources of possible limitations of the technique. Most CVP analyses are based on the static cost concept. One assumption is that all costs can be classified into two categories: fixed costs and variable costs. This assumption is not always true because certain costs (e.g., depreciation) … Read more

Margin of Safety

Margin of Safety: Definition The difference between the actual sales volume and the break-even sales volume is called the margin of safety. It shows the proportion of the current sales that determine the firm’s profit. Formula to Calculate the Margin of Safety Margin of safety = Actual sales volume – Break-even sales volume Formula to … Read more

Graphical Representation of Break-Even Analysis

Break-even Chart Cost-volume-profit (CVP) relationships, or break-even relationships, can be visualized using graphs. Doing so comes with the advantage of showing CVP relationships over a range of sales. Graphical analysis also enables managers to identify areas of profit or loss that would occur for a broad range of sales activities. To give an example, consider … 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 the volume of activity at which a company’s total revenue equals the sum of all variable and fixed costs. The activity can be expressed in units or in dollar sales. The break-even point is the point at which there is no profit or loss. At the break-even point, … Read more

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 that adds actual direct material, actual direct labor, and applied manufacturing overhead costs to the work-in-process inventory. Actual Costing An actual costing system is a product costing system that adds actual direct material, actual direct labor, and actual manufacturing overhead costs to the work-in-process inventory.