Cost Volume Profit Analysis

Faculty
Dr. Amit Kumar Nag
Associate Professor
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Lecture Outline
 Introduction
 Importance of Cost Volume Profit
Analysis
 Break Even Point
 Assumptions of Break Even Point
 Limitations of Break Even Point
 Application of Break Even Analysis
 Computation of Break Even Analysis,
Profit Volume Ratio & Margin of Safety
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Cost- Volume Profit Analysis- Introduction
The Study of relationship among three
important factors, viz., cost, volume and
profit is known as Cost-Volume-Profit
Analysis.
Narrower Sense- Concerned with finding
Break Even Point only.
Broader Sense- It is a technique of
management accounting which determines
profit, cost and sales value at different
levels of production.

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 Importance of Cost- Volume-Profit
Analysis
 Setting up of Flexible Budget
 Determination of Break Even Point (B.E.P)
 Profit Planning
 Decision relating to selection of alternatives
 Performance Evaluation for Control
 Helpful in Price Fixation
 Allocation of Overhead Costs
 Analysis of effect of changes in Cost

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 Meaning of Break Even Point
 Break Even Point is that point of production or
sales at which the firm neither earns any profit
nor incurs any loss.
 Definition
 The Break Even Point is that point of sales
volume where total revenues and total
expenses are equal, it is also said as the point
of zero profit or zero loss.
-Charles T Horngren

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Assumptions of Break Even Point
 Fixed and Variable Costs
 Proportionate Variable Cost
 Certain and Constant Fixed Cost
 Unchanged Selling Price
 Linear Behaviour
 Technological Stability
 No role of Stock
 No change in General Price Level
 Unchanged Sales Mix
 Relationship Between Volume and Cost

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Limitations of Break Even Point Analysis
 Division in Fixed and Variable Costs
 Static Concept
 Limitation of Linear Behaviour of Costs
 Difference in production and sales
 Change in Sales Mix
 Maximum and Optimum Production
 Capital employed is ignored
 Limitation of Lack of Perfect Competition
 Sale of many products

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Application of Break Even Point Analysis
 Determination of Break Even Point
 Calculation of Profit at different levels of sales,
 Determination of sales to earn desired profit
 Fixation of new selling price at a particular break even
point
 Estimation of Margin of safety
 Estimation of effect of change in fixed and variable
costs on B.E.P. and sales
 Make or Buy Decisions
 Determination of optimum sales-mix
 Decision of change of capacity

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