Effect Of Cvp Analysis On Cost Accounting
THEORETICAL BACKGROUND OF THE STUDY
Cost can be defined as the amount that has to be paid in order to get something. In companies or industries cost is valuation of effort, resources, material, time spent, risks incurred and opportunity in production and delivery of goods. Cost accounting is also considered as cost volume profit analysis. This model is useful elementary instruction and for making short run decisions. Cost accounting is process of finding cost for the production of fixed cost and variable cost. By making an attempt to deal with the relationship between costs, sales and net income, management would become more efficient to cope with planning decisions and forecasting techniques.
Cost volume profit analysis …show more content…
Break even analysis is supply side analysis. Beak even analysis indicates at what level the volume of cost and revenue or sales are equal and there is no profit and no loss. CVP analysis is basic for understanding the short run related decisions transfer pricing and target costing. The fixed will remain constant with whatever the conditions it depends on. If volume is changed then there is a change in the variable cost. So by this all the fixed cost will be remained as fixed and thus profit also varies. The BEP analysis is an initial examination that is more precise than CVP …show more content…
All the organizations primary goal is to get profit. Profit depends on many factors like sales and the production cost. Both of these factors are interdependent. Cost volume profit analysis can provide clear picture of analytical and also what if type of questions. Although CVP analysis is simple but it is useful in commercial operations. Following are some of approaches to CVP analysis: revenue and cost formula, graph of profit and contribution margin.
Assumptions of CVP Analysis
The CVP analysis is based on some of the assumptions. Following are some of assumptions considered:
The all cost can be divided into fixed cost and variable cost.
The changes in the level of revenue and costs will come only when number of product is produced and sold.
Changes in the activity are the only factors that affect costs.
Capability and output is assumed to be constant at all levels.
There is a linear bond between cost and revenue.
All cost and revenue can be compared without value of the money.
The price elasticity concept has no value in this CVP analysis.
It assumes that sales and production is synchronized at some point of time. In other words opening and closing level remain insignificant in