Cvp Analysis

In: Business and Management

Submitted By manowarb
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CVP analysis: A tool for business decision making
Introduction
Cost-Volume-Profit Analysis (CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analyses.Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis.
Cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume level at which total revenues are equal to total costs. When total costs and total revenues are equal, the business organization is said to be “breaking even.” The analysis is based on a set of linear equations for a straight line and the separation of variable and fixed costs.
Total variable costs are considered to be those costs that vary as the production volume changes. In a factory, production volume is considered to be the number of units produced, but in a governmental organization with no assembly process, the units produced might refer, for example, to the number of welfare cases processed.
There are a number of costs that vary or change, but if the variation is not due to volume changes, it is not considered to be a variable cost. Examples of variable costs are direct materials and direct labor. Total fixed costs do not vary as volume levels change within the relevant range. Examples of fixed costs are straight-line depreciation and annual insurance charges. Total variable costs can be viewed as a 45 line and total fixed costs as a straight line. In the break-even chart shown in Figure 1, the…...

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