PROFIT COST VOLUME ANALYSIS

PROFIT COST VOLUME ANALYSIS

This is the managerial tool which indicates the relationship that exists between the different elements of selling price, cost, volume, and profit of a given activity. With the name being suggested CVP which is the analysis of the given variables which include cost, profit, and volume analysis will be exploring the relationship between the activity, cost, revenue, and profit levels. This aims at the measurement of the various elements of volume and cost. The CVP analysis has been the most commonly used for the planning. This can also be used in assisting with the controlling decisions as well as the evaluation of the decisions. CVP analysis is mainly helpful for making decisions that are linked up with the marketing, production, pricing, and the cost structure besides many more (Abdullahi et al., 2017).

ASSUMPTIONS

The first assumption is to change the number of units that are produced or the provided services which would lead in changing the level of cost and revenue. For instance, the number of computers which had been sold out by Sony Corporation had been delivered with the help of the Overnight Express. The number of units where there is only revenue driver has been the costs driver in all means and this affects the costs where the revenue driver has been available with the volume as well as the revenue that affects casually.

Here the total costs and revenue are quite linear (Armean, Ardeleanu, 2017).

Here the variable cost, selling price, and the fixed cost are known and are constant.

Without considering the time value, all the cost and revenues have been added and compared with the subtraction.

The cost here could get separated with two types namely the fixed cost and the other one is the variable component fixed component and this won’t change in terms of the output level where the variable component will be changing at the output level. The fixed cost will include both the direct and indirect product costs and in the same way, the variable cost also includes both the direct and indirect variable product cost (Hassanah, Daud, 2019).

FORMULA:

Number of units sold ×price per unit = number of units sold × variable cost per unit +fixed cost + profit

EXAMPLE:

Priyanka wishes to make an annual profit of £ 100000 from the sales of appliances details of manufacturing and capacity are as follows

Production capacity 10,000 units

Fixed cost 30000 £

Variable cost per unit 30 £

Answer:

10000*x=(10000*30)+£30000+£100000

10000*x=£430000

X=£43

Therefore, the unit price = £43 and this implies that Priynka need to sell over 10,000 units with the price tag of £43 that gets the target profit of over one lakh and this further can see that the fixed cost which remains to be the constant irrespective of sales level.

VARIABLE COSTING

These are the costs which will be tending to vary between the volume and the activity results that are increasing with the variable cost with the direct labor variable costing which forms the concept that has been used in the management accounting as well as the cost accounting. This helps the decision making that would assume the overhead costs that are textured and this could also help in creating the issues as one don’t know how to allocate the fixed cost towards every product (Geiszler et al., 2017).

In the variable costing below costs are considered into the product:

Variable manufacturing overheads.

Direct labour cost

Direct material cost

These are commonly known as product costs.

Example:

Direct material Rupees 15000

Variable manufacturing overhead rupees 8000

Direct labour cost rupees 7500

Units produced = 100000 units

Answer: total = 30500/100000= rs.0.35 variable cost per unit

If in case the managers are included with the fixed cost in terms of the cost calculations where the decision making will be incorrect which will incur the extra fixed cost that would help in producing the special order and also the variable cost which plays the crucial role towards the decision making. The variable costing would be established with the lowest possible price which needs to be sold. With the addition of the herbal quotes there would be semi-variable cost that comes with the cost and fixed with the variable parts but leads the fluctuations in different levels of activity (Namazi, 2016).

VARIABLE COSTING IN MANAGERIAL DECISION

The variable costing here forms the opposite in terms of the absorption costing which is to be considered with the manufacturing cost needed for the reporting purpose where the variable costing forms the accounting with the tool of decision making where the manager makes use of the internal recording purpose. The variable cost would be helpful in determining the impact that discontinues the product as well as the costs that are related to the production (Novak et al., 2016).

EXAMPLE

1cake                 2.cakes         8 cakes         10 cakes         0cakes

Sugar,flour             5                          10                  40                   50                    0

Butter milk

Direct                    10                        20                    80                100                     0

Labour

Total vc                15                        30                     120             150                      0

With the increased production cost, the variable cost also increases where there will be no production of the variable cost that is equal to the fixed cost and the variable cost which would comprise the total cost and this helps in determining the profit of the organization.

Profit = sales -variable costs- fixed costs

 

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