COST-VOLUME-

PROFIT ANALYSIS
CVP • A technique that looks at the
ANALYSI effect of differing levels of
S activity on profit.

• An extension of the principles

of marginal costing.

• Looks at the effects of

differing levels of activity
on the profits of an
organisation.
CVP • Break-even analysis
ANALYSI
S
• The management of
scarce recourses

• Make or buy
decisions
RELATIONSHI • In order to make a profit
P BETWEEN
VARIABLES the process has to be
managed.

• Selling price
• Sales volume
• Variable costs
• profit
 • CVP is the analysis of
the relationship
CVP between cost and
volume of activities and
the effect of the
relationship on profit.

• Forecast the volume of

activity at which the firm
will break even or attain
a target profit.
CVP • It enables managers to
determine the effect on profit
of changes in the selling price,
in costs or changes in the
level of activity.
ADVANTAGES • Decision making

• Profit planning

• Cost control

• Price setting
DISADVA • Fixed element, variable
N TAGES element,
OF COST-
VOLUME • Semi-variable costs-
telephone charges

• Assumes fixed costs will

remain constant over the
relevant range
RELEVAN • The range of activity over which
T RANGE: forecasts and plans apply.

• As sales volume increase, some

fixed costs may become
stepped costs.

• E.g.. As more business is

undertaken then more
supervisors may be required or
more storage facilities
needed.
LIMITATION • It is only relevant where
S OF COST- either a single product is
VOLUME- being sold or alternatively
PROFIT there are multiple products in
ANALYSIS a constant mix.

• If the product mix changes so

will the break-even-point.
LIMITATION • It assumes that all variables
S OF COST- other than sales volume
VOLUME- remain constant.
PROFIT
ANALYSIS • This not always true.

• E.g. As volumes increase,

economies of scale may be
achieved.
LIMITATION • It assumes that the selling
S OF COST- price will remain
VOLUME- constant
PROFIT • As profits are calculated on a
ANALYSIS marginal cost basis, it is
assumed that if absorption
costing is used, then
production volumes are equal
to sales volumes.
EVALUATION AND • Cost-volume-profit analysis
• Pg. 255
INTERPRETATION
OF COST-
VOLUME-PROFIT
ANALYSIS
UNIT, JOB • Unit costing: The measure of
AND BATCH a company’s costs to produce
one unit of product.
COSTING
• Job costing: The costing of
jobs carried out to specific
customer requirements.
UNIT • Illustration 1
COSTING
• Pg. 258
JOB • Examples: repairs to a
motor vehicle
COSTING
• Printing 5000 sales leaflets

• Building a computer to
specific
customer
requirements.

• Illustration 2: Job
costing
BATCH • The costing of a job involving
COSTING the production of a quantity
of identical items.

• Pg. 259 Illustration 3