Assignment on Cost-Volume-Profit Analysis (CVP)

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Module 12 : Cost Volume Profit Analysis
Lecture 1 : Cost Volume Profit Analysis
Objectives
In this lecture you will learn the following
Cost Volume Profit (CVP)
Introduction.
Fixed costs.
Variable costs.
Semi variable costs.
Contribution margin.
Break even point.
PV Ratio.

CVP Analysis
CVP analysis is the analysis of three variable viz. cost, volume and profit. Such analysis explores the
relationship existing amongst costs, revenue, activity level and resulting profit. It aims at measuring
variation of cost with profit.

Fixed Cost
These are the costs which incurred for a period and which within certain output and turnover limits, tend
to be unaffected by fluctuations in the levels of activity (Output or turnover).
For example: Rent, insurance of factory building etc. remain the same for different levels of production.

Fixed Cost Graph

Variable Cost
These costs tend to very with the volume of activity. Any increase in activity results in an increase in the
variable cost and vice versa.
For example: Cost of direct labour, direct material, etc.
Variable Cost Graph

Semi-Variable Cost
These costs contain both fixed and variable components and thus partly affected by fluctuation in the
level of activity.
Examples of semi variable costs are telephone bill, gas and electricity etc.
Semi-Variable Cost Graph

Cost-Volume-Profit Analysis
CVP analysis:
Takes into account
- the total costs (fixed and variable)
- the total sales revenues
- desired profits vis-a-vis the sales volume
It is used for forecasting or predicting how the changes in costs and sales volume affect profit. It is also
known as 'Break-Even Analysis'.
CVP analysis could be helpful in the following situations:
Budget planning: for forecasting profit by considering cost and profit relation, and volume of production
volume. This will help in determining the sales volume required to make a profit.
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