Wednesday, January 23, 2008

Assumptions of CVP Analysis

Cost behavior analysis is the study of how specific costs respond to changes in the level of business activity.

Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company’s profits. CVP analysis is important in profit planning. A prerequisite to understanding cost volume- profit (CVP) relationships is knowledge of how costs behave.

Assumptions of CVP Analysis

1. Selling price is constant.
2. Costs are completely linear.
3. In multi-product companies, the sales mix is constant.
4. In manufacturing companies, inventory accounts do not change,units produced = units sold.

For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements.

Cost Behavior Analysis

  • Variable costs
  • Fixed costs
  • Relevant range
  • Mixed costs
  • Identifying variable and fixed costs

Cost-Volume-Profit Analysis

  • Basic components
  • CVP income statement
  • Break-even analysis
  • Target net income
  • Margin of safety

Additional Accounting Examples and Accounting Links:


Abir said...


Unknown said...

Cost behavior analysis is an interesting study to me. This is the first time I've learned about it and glad to a new level of business analysis. In marketing today collaboration is key and generally analtyics tools (like the finance summary module from PanXpan) can help with this.

William Leo said...

CVP analysis is important in profit planning. This information is very useful to me. For more information, visit here: sole trader accountants in London

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