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Meaning Of Cost-Volume-Profit (CVP) Analysis And Costs-Volume Relationship

Meaning Of Cost-Volume-Profit Analysis(CVP Analysis)

Every firm has a prime motive of not only earning profit but also maximizing it. A profit does not happen by chance. It has to be managed. Cost-volume-profit analysis (CVP Analysis) is a tool of planning for profit. CVP analysis is helpful for developing alternative strategies in sales planning and cost estimation. Certain relationship exists among the variables like selling price, sales volume and taxes. Cost-volu-profit analysis (CVP analysis) is an accounting technique showing the relationship among these variables. CVP analysis, though most often illustrates business cases, is equally applicable for not profit making organizations to allocate scarce economic resources most effectively among the competing alternatives. Allocation of scarce resources among the various demanding sectors is the most important issue of national planning.
CVP analysis is the analysis of the relationship between cost and volume of activities and the effect of the relationship on profit. Managers can use the concept of cost-volume-profit analysis to forecast volume of activity at which the firm will break-even or attain target profits. CVP analysis is therefore, a useful tool that helps managers, business owners and entrepreneurs to determine the profit potential of a new firm or the impact on profit due to changes in selling price, cost or level of activities of current business.

Costs-Volume Relationship

Costs show important behavior in relation to the volume of activity such as:
* Total variable costs change in the same proportion and in the same direction as the volume by output change.
* Per unit variable costs remain fixed.
* Total fixed costs remain unchanged for the same period of time whatever is the level of output within the relevant range.
* Per unit fixed costs are variable.

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