Cost-volume-profit (CVP) analysis is a technique used to determine the effects of changes in an organization’s sales volume on its costs, revenue, and profit.
CVP analysis is also used to analyze the effects on profit of various factors, namely:
To profit is the first law of any business enterprise.
If profit isn’t there, the enterprise is liable to be eliminated. However, very few managers know about the profit structure in their own company or the basic elements that determine the profit structure.
Cost-volume-profit (CVP) analysis is an important tool that analyzes the interplay of various factors that affect profits.
CVP analysis shows the relationships among a business’s costs, volume, and profits. It is an important part of an organization’s budgeting activities.
CVP analysis is a tool used extensively in both the planning and control functions of an organization.
An organization may use CVP analysis as a planning tool when the management wants to find out the desired profit when the sales volume is known.
Alternatively, the management may begin with a target profit and then work out the level of sales needed to reach that profit level.
As a control technique, CVP analysis is used to measure the performance of the different departments in a company.
A basic application of CVP analysis is break-even analysis. Break-even analysis is concerned with determining the sales volume at which total revenue equals total costs so that profits are seen.
Cost Volume Profit (CVP) Analysis is a technique used to determine the volume of activity or sales required for an organization to break even or make a profit. It looks at the relationship between costs, sales volume, and profits over various levels of activity.
CVP Analysis can be used by managers to help them decide on pricing policies, output levels, cost control strategies, and capital investments. It provides important information about how changes in costs and other factors will affect profitability as well as helps managers identify breakeven points for budgeting purposes.
The main components of CVP Analysis are cost structure, sales volume, and revenue. Each component is studied about one another to determine how changes in any one area will affect overall profitability.
Cost categories that are typically included in a CVP analysis include fixed costs, variable costs, direct materials, direct labor, and overhead expenses. These costs can be identified through an organization's income statement or accounting records.
Break-even point is the level at which total revenue equals total costs, i.e. when a company or organization makes neither a profit nor loss. This point can be calculated using CVP Analysis and is used to assess the viability of a project or product line, as well as determine what level of output must be achieved in order to make a desired return on investment (ROI).
About the Author
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
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