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What is the CVP and CVP analysis? How important CVP analysis in Managerial accounting?

What is the CVP and CVP analysis? How important CVP analysis in Managerial accounting?

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Cost-Volume-Profit Analysis

Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including:

  • Sales price per unit is constant.
  • Variable costs per unit are constant.

  • Total fixed costs are constant.

  • Everything produced is sold.

  • Costs are only affected because activity changes.

  • If a company sells more than one product, they are sold in the same mix.

Importance of CVP Analysis:

The CVP analysis is very much useful to 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 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.

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