Business, Legal & Accounting Glossary
COST-VOLUME-PROFIT ANALYSIS Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point (BEP), a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analyses.
The cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis.
The assumptions underlying CVP analysis are:
CVP assumes the following:
These are simplifying, largely linearizing assumptions, which are often implicitly assumed in elementary discussions of costs and profits. In more advanced treatments and practice, costs and revenue are nonlinear and the analysis is more complicated, but the intuition afforded by linear CVP remains basic and useful.
CVP simplifies the computation of breakeven in break-even analysis, and more generally allows simple computation of Target Income Sales. It simplifies analysis of short-run trade-offs in operational decisions.
CVP is a short run, marginal analysis: it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though, in the long run, all costs are variable. For a longer-term analysis that considers the entire life-cycle of a product, one therefore often prefers activity-based costing or throughput accounting.
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This glossary post was last updated: 19th April, 2020 | 0 Views.