Limitations of Cost-Volume-Profit (CVP) Analysis

Categories: BusinessLimitations

In any company it is extremely apparent for concerns like, what effect on profit can it expect if it produces more products? What quantity of items and services must a business sell in order to recover cost for the year? What occurs to the breakeven point of the organisation if it chooses to include or increase the amount of a product and services they currently offer? to occur. The analytical strategy that helps the managerial accounting professionals to address these concerns is called Expense Volume revenue analysis.

(Tata McGraw-Hill, 2008 p. 298). It offers with vital details about the impact of income raised and the cost incurred within a certain service. CVP analysis can also be used to analyse the result on profit due to changes in costs, costs, tax, interests and the mix of item offered by the organisation. (Tata McGraw-Hill, 2008 p. 298).

CVP analysis is used by the managers in day to day basis in order to run the organisation smoothly. Correct use of this can lead to an in-depth understanding of what actions should and can be taken in order to save the business from dealing with any loss, and make earnings or a minimum of break even.

Get quality help now
Dr. Karlyna PhD
Dr. Karlyna PhD
checked Verified writer

Proficient in: Business

star star star star 4.7 (235)

“ Amazing writer! I am really satisfied with her work. An excellent price as well. ”

avatar avatar avatar
+84 relevant experts are online
Hire writer

CVP analysis is a practical tool for the management however it likewise suffers with some limitations. It offers the management with the insight of the current position of business and also reflects any prospective issues the business might face in a brief run. CVP graph directs management's attention to this circumstance but is unable to supply a solution to any prospective problem within business.

Get to Know The Price Estimate For Your Paper
Topic
Number of pages
Email Invalid email

By clicking “Check Writers’ Offers”, you agree to our terms of service and privacy policy. We’ll occasionally send you promo and account related email

"You must agree to out terms of services and privacy policy"
Write my paper

You won’t be charged yet!

(Tata McGraw-Hill, 2008 p. 303).

Many assumptions should be made in order to produce a CVP analysis such as, keeping the total revenue linear which means the price or product or service will not change as sales changes, keeping total expense linear which means the total fixed and the unit variable expense remains unchanged as activity varies, the efficiency and productivity remains constant and the sales mix in a multi products company remains constant. (Tata McGraw-Hill, 2008 p.314). All these assumptions are very much necessary in order to produce a CVP analysis but they are not necessarily constants in a day to day business. If by any reasons the sales mix changes in the business than a new CVP analysis should be made for this new sales mix. CVP analysis provides the management of any organisation with vital information that it requires for day to day operation but also has some limitations.

Reference

  1. Tata McGraw-Hill (2008) Managerial Accounting: Creating Value in a Dynamic Business Environment. New Delhi, Tata McGraw-Hill Publishing Company Limited.
Updated: Apr 12, 2021
Cite this page

Limitations of Cost-Volume-Profit (CVP) Analysis. (2016, Oct 07). Retrieved from https://studymoose.com/limitations-of-cost-volume-profit-cvp-analysis-essay

Limitations of Cost-Volume-Profit (CVP) Analysis essay
Live chat  with support 24/7

👋 Hi! I’m your smart assistant Amy!

Don’t know where to start? Type your requirements and I’ll connect you to an academic expert within 3 minutes.

get help with your assignment