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Accounting cvp analysis

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Cost Accounting - CVP Analysis
Cost-Volume-Profit (CVP) Analysis is also known as BreakEven Analysis. Every business
organization works to maximize its profits. With the help of CVP analysis, the management
studies the co-relation of profit and the level of production.
CVP analysis is concerned with the level of activity where total sales equals the total cost and it
is called as the break-even point. In other words, we study the sales value, cost and profit at
different levels of production. CVP analysis highlights the relationship between the cost, the
sales value, and the profit.
Assumptions
Let us go through the assumptions for CVP analysis:
Variable costs remain variable and fixed costs remain static at every level of production.
Sales volume does not affect the selling price of the product. We can assume the selling price
as constant.
At all level of sales, the volume, material, and labor costs remain constant.
Efficiency and productivity remains unchanged at all the levels of sales volume.
The sales-mix at all level of sales remains constant in a multi-product situation.
The relevant factor which affects the cost and revenue is volume only.
The volume of sales is equal to the volume of production.
Marginal Cost Equation
Equations for elements of cost are as follows:
Sales = Variable costs + Fixed Expenses ± Profit /Loss
or:
Sales Variable Cost = Fixed Expenses ± Profit /Loss
or:
Sales Variable Cost = Contribution
It is necessary to understand the following four concepts, their calculations, and applications to
know the mathematical relation between cost, volume, and profit:
Contribution

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Profit Volume Ratio (P/V Ratio or Contribution/Sales (C/S))
Break-Even Point
Margin of Safety
Contribution
Contribution = Sales Marginal Cost
We have already discussed contribution in Marginal Costing topic above.
Profit-Volume Ratio
Profit / Volume (P/V) ratio is calculated while studying the profitability of operations of a
business and to establish a relation between Sales and Contribution. It is one of the most
important ratios, calculated as under:
P⁄V Ratio =
Contribution Sales
=
Fixed Expenses+Profit Sales
=
Sales−Variable Cost Sales
=
Change in profits of Contributions Change in Sales
The P/V Ratio shares a direct relation with profits. Higher the P/V ratio, more the profit and vice-
a-versa.
Break-Even Point
When the total cost of executing business equals to the total sales, it is called break-even point.
Contribution equals to the fixed cost at this point. Here is a formula to calculate break-even
point:
B.E.P (in units) =
Total Fixed Expenses Selling Price per Unit − Marginal Cost per Unit
=
Total Fixed Expenses Contribution per Unit
Break-even point based on total sales:
=
Fixed Cost P⁄V Ratio
Calculation of output or sales value at which a desired profit is earned:
=
Fixed Expenses + Desired Profit Selling Price per Unit − Marginal Cost per Unit

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Cost Accounting - CVP Analysis Cost-Volume-Profit (CVP) Analysis is also known as Break–Even Analysis. Every business organization works to maximize its profits. With the help of CVP analysis, the management studies the co-relation of profit and the level of production. CVP analysis is concerned with the level of activity where total sales equals the total cost and it is called as the break-even point. In other words, we study the sales value, cost and profit at different levels of production. CVP analysis highlights the relationship between the cost, the sales value, and the profit. Assumptions Let us go through the assumptions for CVP analysis: Variable costs remain variable and fixed costs remain static at every level of production. Sales volume does not affect the selling price of the product. We can assume the selling price as constant. At all level of sales, the volume, material, and labor costs remain constant. Efficiency and productivity remains unchanged at all the levels of sales volume. The sales-mix at all level of sales remains constant in a multi-product situation. The relevant factor which affects the cost and revenue is volume only. The volume of sales is equal to ...
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