Question

The importance of using CVP analysis for businesses from managerial accounting perspective. The assignment needs to present how the CVP analysis is used, for which purpose and how it's important for businesses. Also, assignment should convey logical reasoning for the information presented, clarity in conveying the required points.

Answer 1

CVP is the abbreviated form for "Cost Volume Profit".This is techniques used in management accounting to determine profit levels for varying cost and volume levels.The guiding factor is the Contribution Margin which excess of Revenue over Variable Costs.Basis the Margin breakeven levels get determined.At the breakeven level the Contribution Margin is equal to Fixed Costs.

Therefore for desired profit levels the colume can be determined by adding the profit targets desired to the Fixed Costs and then working upwards.Say for instance Margin per unit is $ 10 and the total fixed costs are $ 1000.This means that 100 units (1000 / 10) produced and sold will ensure all fixed costs are covered.If further suppose the Organization wishes to earn a profit margin of $ 200 then the target volume changes to 120 units (1200/10).

What also follows from above is that there are some undelining pre requisites for having a effective CVP model and those are -

• Clear seggregation between Fixed and Variable Costs
• Sale price , variable cost per unit are constant and so are Fixed costs.

There are certain costs that donot move proportionately to production but in a stepped fashion.The nature of these costs need to plotted properly to decipher the behaviour so that the CVP results are more accurate.