Relationship between volume of activity cost and profit

The Relationship of Cost, Volume and Profit in Business | the STUDENT CENTER

relationship between volume of activity cost and profit

Changes in level or volume of activity should be correlated with changes in costs. . A graph showing the relationship between costs, volume, and profits. More especially cost -volume-profit analysis is used by managers to plan . cost- volume-profit relationship over wide range of activity and give. Cost Volume-Profit (CVP) relationship is an analysis which studies the relationships between the following factors and its impact on the amount of profits .

The contribution margin is a company's sales less its variable expenses. Then, divide the company's fixed costs by the contribution margin.

This will give you the company's break-even point in total dollars of sales.

What is Cost Volume-Profit relationship?

If you want to calculate the break-even point in units sold, replace the contribution margin in the denominator with the contribution margin per unit. The contribution margin per unit is calculated as the sales price less the variable cost per unit.

Margin of Safety The margin of safety is volume of sales that the company is selling above the break-even point. Like the break-even point, the margin of safety can be expressed either in units or sales dollars. However, the margin of safety is most often expressed as a percentage of sales. The first step in calculating the margin of safety is to calculate the break-even point in sales dollars.

Once the break-even point is calculated, this figure is subtracted from the actual sales in dollars. This figure is the margin of safety in dollars. To convert this to a percentage, simply divide the margin of safety in dollars by the actual sales and multiple by Target Profit While knowing the break-even point is important, most businesses hope to do better than break even.

  • Cost-Volume-Profit Analysis
  • Cost-volume-profit Analysis and Decision Making in the Manufacturing Industries of Nigeria
  • Cost-Volume-Profit Relationship & Break Even Analysis

Often small-business owners will aspire to a target level of profit. CVP analysis allows owners to calculate the level of sales require to achieve this goal. Finally this study is aimed at examining the effect of costvolume-profit analysis on decision making process of some selected manufacturing industries in Nigeria.

relationship between volume of activity cost and profit

The major problem encountered by manufacturing industries when cost-volume-profit analysis stands as a basis for decision making is managerial inefficiency and this includes ignorance of this concept ie inability of the management to employ it in their decision making and also not knowing the importance of costvolume- profit analysis.

Manufacturing industries are not relevant in their decision making process. Most manufacturing industries in Nigeria do not determine the extent to which cost-volumeprofit analysis affect their various decisions. Manufacturing industries is faced with the problem of how to make use of the available scare resources in order to achieve the objective of profit maximization.

The Relationship of Cost, Volume and Profit in Business

To what extent is cost- volume-profit analysis considered relevant in the decision making process of manufacturing industries? To what extent does the application of cost-volume profit analysis technique in decision making process enhance managerial efficiency of manufacturing industries?

To what extent does cost-volume-profit analysis affect the various decisions of manufacturing industries? To what extent does each of the identified approaches to cost volume profit analysis is being adopted in manufacturing industries?

What is the decision making opportunities of the selected industries based on their reorder level and economic order quantity? Conceptual Framework Adenji states that cost-volume-profit analysis are predetermined costs, target costs or carefully pre planned costs which management endeavors to achieve with a view to establishing or attaining maximum efficiency in the production process.

According to him, cost-volume-profit analysis is cost plans relating to a single cost unit. Because cost-volumeprofitanalysis purports to be what cost should be, any deviation represents a measure of performance. The predetermined costs are known as cost-volume-profit analysis and the difference between the cost-volume-profit analysis and actual costs are known as a variance. Drury defines cost-volume-profit analysis as predetermined cost; they are cost that should be marred under efficient operating conditions.

Managerial Accounting Cost-Volume-Profit & Break-Even

The cost volumeprofit analysis may be determined on a number of bases. The main uses of cost-volume-profit analysis are in performance measurement, control, stock valuation and in the establishment of selling prices. Cost-volume-profit analysis is a target cost which should be attained.

relationship between volume of activity cost and profit

The buildup of cost-volume-profit analysis is based on sound technical and engineering studies, knowing the production methods and layouts, work studies and work measurement, materials specification and wage and material price projections.

A cost-volume-profit analysis is not an average of previous costs.

Cost-Volume-Profit Analysis

They are likely to contain the results of past inefficiencies and mistakes. Furthermore, changes in methods, technology and costs make comparison with the past of doubtful value for control purposes.

relationship between volume of activity cost and profit

In order to assist the decision making of manufacturing industries in cost-volume-profit analysis control, the cost-volume profit analysis system must first of all indicate what is attainable by efficient performance and then highlight any area where attainable efficiency is not being achieved. Cost- volume- profit analysis, according to Glautier et alis the systematic examination of the inter relationship between selling prices, sales and production volume, cost, expenses and profits.

Costvolume-profit analysis will also be employed on making vita and reasonable decision when a firm is faced with managerial problems which have cost volume and profit implications.

Costvolume- profit analysis according to Hilton R. The relationship between a products revenue and cost function expressed within the cost-volume-profit analysis are used to evaluate the financial implication of a wide range of strategic and operational decisions.

relationship between volume of activity cost and profit

According to Garrison et al cost-volume-profit analysis is a study of inter-relationship between the following factors: