Cost-Volume-Profit Analysis Assignment

CHARLENE MAE S. ZAMBALE

Question:

How can production management be improved with your knowledge and understanding of Cost-
Volume-Profit Relationship?

Answer:

Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that

varying levels of costs and volume have on operating profit. The cost-volume-profit analysis,
also commonly known as break-even analysis, looks to determine the break-even point for
different sales volumes and cost structures, which can be useful for managers making short-term
economic decisions.

CVP analysis estimates how much changes in a company's costs, both fixed and variable, sales
volume, and price, affect a company's profit. This is a very powerful tool in managerial finance
and accounting. It is one of the most widely used tools in managerial accounting to help
managers make better decisions.

The CVP analysis is very much useful to operation 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 operation 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.