ACCOUNTING

Assignment

Assignment

Cost-Volume Profit (CVP) Analysis

The analysis of cost -volume- profit (CVP) provides a financial snapshot overview of the process of planning. The CVP is formed on the simplifying assumptions about the behavior of costs. The term CVP analyzes the behavior of total costs, total revenue and operating income as changes occur at the level of products, selling price, costs, variable or fixed costs. This analysis uses a single factor of revenue and a cost factor alone. A.The analysis is a useful tool for planning costs. It can provide income data that different structures mean cost for a business.

Assumptions

The analysis is based under the following assumptions:

Total costs can be divided into a fixed component and a variable on a factor related to production.

The behavior of the total income of the total cost is linear in relation to production units.

There is uncertainty over the details of costs, revenues and production quantities used.

The analysis covers a single product or assumes that a product sales mix remains constant, independent of the change of volume of total sales.

All revenues and costs can be added and compared without considering the value of money in time.

Break-Even Analysis

A break-even analysis calculates the point at which revenue equals expense. How many admissions, clients, or patients must there be to cover the cost of a service? A museum, symphony, or zoo sets an admission price. Is it enough to cover the actual fixed and variable costs? A human service organization receives a set fee for each client receiving a defined unit of a particular service. Is the reimbursement rate enough to cover the actual cost of providing this service?

Fixed costs do not vary. No matter how many admissions, clients, or units of service, administrative and fundraising expense is incurred. In non-profits, fixed costs usually are indirect costs; that is, they are not directly related to the delivery of a service. Reimbursement rates often do not cover indirect costs. In financial statements, fixed costs are referred to as support expense (e.g., administration and fundraising). Depending on the service, expenses such as occupancy, insurance, and telephone may be fixed.

Variable costs change with an increase or decrease in volume. Usually, variable costs are directly related to providing a service, for example, personnel. In financial statements variable costs are referred to as program expense. If admissions at a museum or the number of children served by a child care program increases or decreases, then there is a corresponding increase or decrease in the number of staff. Volume or quantity of service, therefore, affects variable cost.

Break-even analysis facilitates examination of the relationship between volume and cost. For example, the number of visitors to a museum is equal to total fixed costs divided by the admission price per visitor less the variable cost per visitor.

Number of visitors = fixed cost / (admission price - variable cost per person)

A museum forecasts it will have 100,000 visits in the next fiscal year. Its annual fixed cost is $1 ...