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Cost-Volume-Profit (CVP) Analysis

Introduction

Cost-volume-profit analysis (CVP analysis) deals with how profit and costs change with a change in volume. By studying the relationships between these items, management has better control over its planning and decision-making functions.

What's in Here

CVP analysis, despite being very useful, is subject to several limitations. Certain assumptions must be kept in mind when using and applying CVP analysis concepts. The first lesson takes you through these assumptions.

By analyzing the effect of change in volume to costs and profits, we can determine the break-even point, sales required to achieve a target income, margin of safety, and degree of operating leverage. These topics will be discussed in detail. Finally, you we learn the difference between variable costing and absorption costing.

Image link to CVP Analysis Assumptions
Lesson 1

Assumptions in CVP Analysis

Cost-volume-profit analysis (CVP analysis) helps a business in planning and decision-making. The CVP analysis is subject to the certain limiting assumptions. Learn about them here.
Image link to Contribution Margin Concepts
Lesson 2

Contribution Margin

The concept of contribution margin is fundamental in CVP analysis and other management accounting topics. Contribution margin refers to sales revenue minus total variable costs. It is the amount available to cover fixed costs to be able to generate profits.
Image link to Breakeven Point
Lesson 3

Break-Even Point Analysis

The determination of the break-even point is one of the applications of cost-volume-profit (CVP) analysis. Break-even point refers to the level of activity or sales that will yield to zero profit.
Image link to Target Profit
Lesson 4

Target Profit (Desired Income)

By tweaking the break-even formula and incorporating a desired profit, we can determine the number of units to sell to be able to generate the income desired.
Image link to Margin of Safety
Lesson 5

Margin of Safety

The margin of safety is a measure of the difference between the actual (or budgeted sales) and the break-even sales. It determines the level by which sales can drop before a business incurs in losses.
Image link to Operating Leverage
Lesson 6

Degree of Operating Leverage

The degree of operating leverage (DOL) is used to measure the extent of the change in operating income resulting from change in sales. It basically answers the question: "By how many times will operating profit increase or decrease in relation to the increase or decrease in sales?".
Image link to Multi-Product Breakeven
Lesson 7

Multi-Product Break-Even Analysis

The determination of the break-even point in CVP analysis is easy once the variable and fixed components of costs have been determined. A problem arises when the company sells more than one type of product.
Image link to Variable and Absorption Costing
Lesson 8

Variable and Absorption Costing

Absorption costing (or full costing) is the acceptable method for tax and external reporting. Variable costing (or direct costing) is not permitted but offers valuable use internally. Learn about the difference between variable and absorption costing.
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