USES OF COST-VOLUME-PROFIT ANALYSIS

The cost-volume-profit analysis looks at total revenues, total costs, and operating
profit change as volume production, unit variable cost, sale price, and fixed costs of a
product change. It is an essential instrument for forecasting and management control.
The method entails various problem-solving tools and procedures based on an
understanding of the patterns of evolution of business costs.

Only under specific conditions and under certain assumptions is the cost-volume-
profit helpful analysis: Changes in revenue and costs owing only to variations in the
number of units of products or services produced and sold. Second, total costs can be
broken down into a fixed component that does not change with production volume and a
variable component that changes with production size. Third, within a relevant period,
changes in total revenues and total expenses are linear about the volume produced.
Fourth, selling price, unit variable cost, and fixed costs are known and constant. Fifth,
Different products will remain constant in total while the total number of units sold
changes. And lastly, all revenues and costs can be aggregated and compared without
considering the time value of money.

The cost-volume-profit analysis may produce incorrect findings if one or more of

these assumptions are missing. In conclusion, the cost-volume-profit model is beneficial
since it provides a comprehensive view of corporate management. To forecast,
managers can utilize the cost-volume-profit analysis to calculate profits for a particular
volume of sales or settle sales to the level required to reach expected profits.
Furthermore, cost-volume-profit analysis is becoming more common in the budgeting
process.

To assist managers in carrying out their activities successfully, every firm must
calculate future revenues. This can be achieved with a cost volume technique. It aids in
detecting operating activity levels to avoid losses and maximize profits. Furthermore, it
helps businesses plan future operations and determine whether or not their
organizational performance is on track. Companies encounter various hazards when
conducting business, and CVP analysis is an excellent technique for mitigating those
risks.
 Cost volume profit analysis can also assist businesses in determining the break-
even point, which is the point at which profits equal zero. Finding the break-even
volume and using it to create graphical representations is one way to do this. It depends
on the structure and size of the organization, and the break-even volume can be stated
in dollars or units. For example, suppose a firm produces a vast number of items. In that
case, the break-even volume should be calculated in sales dollars. However, in a single
product company, the unit technique may be a more efficient way to determine sales
volume. CVP is a useful instrument that assists accountants in making decisions about
future operations. Furthermore, it assists the organization in making the following
decisions: It aids in determining which products and services are beneficial and how a
company can use these products and services to maximize income. It also shows how
much sales volume the organization will need to attain a certain level of profit. It also
indicates how much revenue the company should aim for to avoid losses. It also shows
what the company's budget is likely to be. It also aids in calculating a company's fixed
costs and determining the level of risk associated with a particular investment.

Traditional budgeting often begins with estimating sales levels, cost of goods
sold, and all operating expenses before arriving at a pro forma income statement that
does not account for how changes in variable and fixed costs and sales would affect
profits in the future periods. Modern FP&A experts, on the other hand, have begun to
use CVP analysis throughout the yearly profit plan to investigate the impact of sales on
variable and fixed costs on profits earned. It is a natural extension, if not an integral
aspect, of marginal costing and an important aspect of the company's profit planning
process.

The CVP analysis is extremely beneficial to management since it gives them

insight into the effects and interrelationships of several elements that influence the firm's
earnings. The profit structure of a company is made up of the relationship between cost,
volume, and profit. As a result, the CVP connection is critical for budgeting and profit
forecasting. Formal profit planning and control, on the other hand, necessitates the use
of budgets and other forecasts, and the CVP analysis provides a snapshot of the profit
planning process. It also aids in determining the purpose and accuracy of such
allocations and predictions. It aids in determining the maximum sales volume to
minimize losses and the sales volume at which the firm's profit target will be met as a
starting point in profit planning. Its ultimate goal is to assist management in determining
the most lucrative cost-volume combination. As a result, dynamic management uses
CVP analysis to continuously estimate and analyze the effects of its short-term
decisions about fixed expenses, marginal costs, sales volume, and selling price on its
profit projections.

Today's company executives are opposed to shortening decision times,

improving quality, lowering costs, and speeding up product/service innovation to
compete in a shrinking world; all of the aforementioned acts require the directors to
renew their decision-making processes. When market changes are completely
unforeseeable, the board of directors must decide on an atmosphere of uncertainty. In
such circumstances, activation decisions are entirely based on the directors' intuition,
common sense, logic, and experience, rather than exact, net, and correct facts.

The difference between projected and actual profit is closely related to cost, sale
cost, and sale volume changes. To be successful in the planning and control phases,
directors must comprehend these intricate relationships. If the directors are aware of
these relationships, they will focus on the items and tactics that will yield the greatest
profit. For these reasons, it is necessary to do thorough research into a strategy for
calculating cost estimates and planning earnings, and reducing the gap between actual
and anticipated outcomes.

The CVP analysis calculates profit based on changes in cost, volume, and price.
The CVP analysis has grown in popularity over time. It has generated useful information
related to controlling production output, planning, and making decisions such as product
types, volume, expanding or narrowing a product line, output break-even point, revenue
and time, and consumption to achieve the target profit. The CVP analysis is a valuable
tool for capturing the reaction and interaction between activities, costs, volumes, and
profits, and it provides a plethora of helpful information for making short-term decisions.

Moreover, the CVP analysis stresses the impact of fixed costs, break-even
points, and target profits that define sales volume and revenue predictions to establish
the output that adds value to the firm. Using the CVP analysis to make price decisions
and price structures is much easier. Furthermore, the CVP analysis informs users about
the sales safety margin that can be maintained before sales hit break-even and
potential losses if sales collapse in the next stage. Calculating fixed costs, variable
costs, break-even points for each course, number of required students in each course,
continued training, narrow or stop for classes, courses, how many training courses are
needed for the school to meet its profit goals are all part of the CVP analysis.

Implementing the CVP analysis model, which assesses the cost of a given
number of students and income, determines the minimum number of students to train to
break even, balances the budget, and determines enrollment targets for the following
year, other things, is critical. Managers benefit from CVP analysis because they can
address particular pragmatic problems that arise during business analysis. Managers
can forecast how future expenditure and production will contribute to the company's
success or failure by asking questions like the company's break-even threshold.
Another significant advantage of CVP analysis is that it provides a comprehensive
picture of company operations. This includes everything from the expenses of
manufacturing a product to the quantity produced. This allows managers to predict what
the future will be like if certain variables are changed.

The management can use CVP analysis to put in variable costs and get a sense
of future performance within a range of possibilities. Managers who aren't detail-
oriented or exact with their data, on the other hand, may suffer as a result. Projections
based on cost estimates rather than specific figures can lead to erroneous results.
Although the CVP technique to analysis is valuable, the amount of information it can
supply in a multi-product operation is restricted. Many of the analyses conducted by
business managers who employ this method are based on a single product. CVP
analysis can be problematic for multi-product firms, such as restaurants, because menu
items, for example, are likely to have several variable cost ratios. This makes CVP
analysis even more complex because it has to be done for each product. As a result,
the manager must proceed with prudence while making judgments on corporate
operations and finances. Decisions must be taken after thorough inquiry and thought,
not just based on data. Instead of just treating employees as part of a statistical model,
an investigation can entail interviewing people and carefully analyzing their everyday
actions.

References:
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https://www.mcser.org/journal/index.php/mjss/article/viewFile/8813/8514

Caramidaru, I. (2009, January 17). The Role of a Foundationalist Approach to Moral

Knowledge in Ethics Management of Economic Organizations. Research Gate.
https://www.researchgate.net/publication/46524165_The_Role_of_a_Foundation
alist_Approach_to_Moral_Knowledge_in_Ethics_Management_of_Economic_Or
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Le, O. T. T. (2020, June 30). Application of Cost-Volume-Profit Analysis in Decision-

Making. The Journal of Asian Finance, Economics and Business.
https://www.koreascience.or.kr/article/JAKO202017764018157.page