Question

Define cost-volume-profit analysis and identify its major assumptions and limitations.

minimum of 300 words.

Answer 1

Cost volume analysis is an analysis which is used to determine how the change in costs and volume of a product affects the operating income and net income of a company. It is the most widely used tools in management accounting.

The most important assumptions underlying cvp analysis are

a) selling price per unit, variable cost per unit and total fixed costs remains constant through out the relevant range

b) the product mix is known in advance in case of multi product situations

c) costs are accurately classified in to fixed and variable

The limitations of cvp analysis are

a) fixed costs are not always constant

b) difficulty in identifying fixed and variable costs

c) selling price per unit is not always constant

d) it is not suitable for multiproduct firm

e) it is not effective in the long run