Cost Volume Profit Analysis
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The CVP or cost volume profit analysis is a professional accounting technique that is related to the effect of sales volume and product costs on operating profit of a business. This analysis is used to determine the break-even point of the business in addition to providing a great help to managers and other business professionals to make short term economic decisions. Moreover, this useful method helps managers to make decisions on how to increase production and decrease the costs associated with manufacturing the products. By establishing the break-even point managers can tweak the numbers to represent the ideal future goal for the company to increase sustainability and increase revenues for the future. Although, if managers do not set up or establish the break-even point, business plays the risk to suffer financial failure. The advantages associated with CVP analysis are the decision making capabilities. This is a resourceful tool that managers use to determine future business decisions. Detail is another great benefit of CVP; the CVP has great detail into the cost associated with the production and the variables in place to help obtain the future goals set by the company’s decision makers. The disadvantage associated with the CVP analysis is that this technique is only good with single product companies.
When using on multiple product companies we must input many variables and duplicate the analysis many times. Also, the CVP is not good on giving accurate answers since the variables can change the CVP will change too, so while it is good for short decision making it does not give an accurate answer. Understanding the Cost-volume-profit (CVP) analysis in business can be useful, especially to entrepreneurs, as it can help them determine the break-even point. The CVP analysis can help the entrepreneur choose whether to change the sale price on current goods or services, introduce new goods or services, or expand into new markets. The CVP analysis will help an entrepreneur determine the quantity of sales or number of products that need to be sold for the business in order to generate an adequate amount of revenue to pay their expenses. When the entrepreneur knows the total number of units sold to reach their break-even point, it will help the entrepreneur avoid sustaining any financial losses over a given period. Entrepreneurs and business managers who do not know the point at which their business will break even will increase their chance of failure in business. The CVP analysis also allows the entrepreneur to see the potential profit they can earn by examining different sales volumes.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision making (4th ed.). NJ: John Wiley & Sons