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Summary of the topic 'what is Cost-Volume-Profit?
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Summary of 4 pages for the course Management Accounting at RuG (summary of ÇVP)
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What is cost-volume profit analysis ?Cost-Volume-Profit (CVP) analysis help managers understand how their decisions affect operating
income and operating risk through their impact on volumes, product mix, prices, unit variable costs,
and fixed costs.
What are the purposes of CVP analysis ?
The profit slope (the increase in profit for every additional unit sold) of
Sweet Smooth is steeper, which means that its profit increases, or
decreases, faster. This makes the operating income of company Sweet
Smooth more volatile (unpredictable), and therefore riskier.
Cost structure refers to the relative proportion of variable and
fixed costs.
CVP analysis provides a simplified yet powerful representation of the relationship between volumes,
revenues, costs, and therefore profit. This knowledge is extremely helpful to managers because it
allows them to infer quickly the impact of a wide variety of decisions on profitability and risk.
Cost-Volume-Profit (CVP) analysis is a decision-making tool helping managers understand
and explain the impact of changes in volumes, product mxi, prices, unit variable costs, and
fixed costs on the cost structure, operating income, and operating risks.
The purpose of CVP analysis is twofold. First, it allows mangers to predict profit for different levels of
activity. It extends cost estimation by literally adding revenues to the equation. Second, it allows
managers to asses operating risk
Operating risk is the volatility of operating income resulting from a company’s cost structure
The profit function helps build a contribution income statement which reveals the cost structure of a
company by clearly separating variable and fixed costs. Profit function, contribution income
statement, and CVP graph then help calculate and visualize two important benchmarks for managers:
- The break-even point – the minimum sales volumes or revenues they must achieve to cover
their fixed costs and start making profit
- The target-profit point – the minimum sales volumes or revenues they must achieve to meet
their objectives of profitability
Profit function, contribution income statement, and CVP graph computation of the break-even and
target-profit points assessment of operating risk sensitivity analyses
How do you reveal the cost structure of an organization ?
The profit function is the combination of two sub-functions
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