Break-even analysis or Cost Volume Analysis (CVP) and Relevant costing
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Course
Costing and Management Accounting
Institution
Costing And Management Accounting
Break-even analysis or Cost Volume Analysis (CVP) and Relevant costing lecture note is about cost volume profit analysis, objective of CVP analysis, method for calculating the break-even point, ascertaining the sales volume required to achieve a target profit, margin of safety, contribution to sale...
Lecture 6
Break-even analysis or Cost Volume Analysis (CVP)
and Relevant costing
COST-VOLUME-PROFIT ANALYSIS
One of the most important decisions that need to be made before any
business even starts is “how much do we need to sell in order to break-
even”. By “break-even”, we mean simply covering all our costs without
making a profit.
The answer to this question is very important as it will indicate that level
where the company breaks even, i.e neither realise a profit nor a loss. This
means that operating at a lower level than the break even point will result in
a loss and operating at a higher level will result in a profit being made.
Break-even analysis is an analytical technique use to study the relations
among fixed costs, variable costs and profits. It denotes that level of activity
at which total costs equals total sales revenue.
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COST-VOLUME-PROFIT ANALYSIS
The term break even analysis is the one commonly used, but it is somewhat
misleading as it implies that the only concern is with that level of activity
which produces neither profit nor loss – the break even point – although the
behaviour of costs and profits at other levels is usually of much greater
significance. Because of this an alternative term, cost-volume-profit analysis
or C-V-P analysis, is frequently used and is more descriptive.
This is the term given to the study of the interrelationships between costs,
volume and profit at various levels of activity.
COST-VOLUME-PROFIT ANALYSIS
THE OBJECTIVE OF CVP ANALYSIS.
CVP analysis looks primarily at the effects of differing levels of activity (Sales Volume)
on the financial results of a business.
The reason for this particular focus on sales volume is because, in the short run, sales
price, and the cost of materials and labour, are usually known with a degree of
accuracy. Sales volume, however, is not so predictable and therefore, in the short-run,
profitability often hinges upon it.
For example, Company A may know that the sales price for product X in a particular
year is going to be in the region of Rs 50 and its variable costs are approximately Rs 30.
It can, therefore, say with some degree of certainty that the contribution per unit (sales
price less variable costs) is Rs 20.
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