Objectives and assumptions in cost-volume-profit analysis
Cost-volume-profit or break-even analysis objectives
- To forecast profits: helps to identify profit relationships, costs and volumes for determining relative profitability and to compare inter-company profitability
- To set budgets: is useful in setting up flexible budgets that indicate costs at different activity levels
- To evaluate performance: helps performance evaluation by focusing on profits achieved and costs incurred
- To set pricing: plays an important part in stabilising volume. BE analysis helps organisations to formulate pricing policies
- To determine overheads: helps to determine the number of overheads that should be allocated to product costs at different levels of operation
- To achieve capacity: focuses on the importance of achieving capacity to achieve economy.
AssumptionsHere are some assumptions about the use of CVP analysis in business.
- CVP analysis costs can be segregated into fixed and variable portions and total fixed costs remain constant at all output levels.
- In CVP, cost linearity is preserved over the relevant range, and revenues are constant per unit.
- A business has a constant product mix and produces only one kind of product.
Financial Analysis for Business Performance: Reporting and Stakeholder Management
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