cvp analysis & absorption costing

Presented by :- Khushang Desai Vidit Bhavasar Vijay Korat Vijay Savaliya Vipul Patel Vikram Sukalani

Presentation onCVP Analysis

& Absorption Costing

WHAT IS CVP ANALYSIS?

CVP analysis deals with how costs and profits change with a change in volume.Management is better able to cope with planning decisions.CVP analysis examines the behavior of total revenues, total costs and operating income as change occur in output level, selling price, variable costs or fixed costs.

CONTINUED…… CVP analysis is one of most powerful tools

that managers have at their command, it helps them understand the interrelationship between cost, volume and profit in an organization by focusing on followings elements:-

Price of products Volume or level of activity Variable cost Total fixed cost Mix of product sold

OBJECTIVES OF CVP ANALYSIS

It is essential to ascertain the relationship between cost and profit on one hand and volume on the other.

It is helpful in setting up flexible budget which indicates costs at various level of activity.

To assist in evaluating performance for purpose of control.

Its helps to management in formulating pricing policy.

ASSUMPTIONS OF CVP ANALYSIS

Selling price is constant.

Total fixed cost and variable cost per unit is constant.

The sales mix is constant in multi-product companies.

Inventory do not change, no. of units produces equal the no. of units sale.

BREAK-EVEN POINT

BEP is unique sales level at which a company earns neither profits or loss.

Total revenues = total costs

BEP is point where operating income is Zero.

BEP is where contribution margin equals fixed costs.

METHOD FOR BEP

TF=TC SP*X=TFC+(V*X) X = TFC/SP-VX is break even SP is selling price V is variable cost TFC is total fixed cost

CVP RELATIONSHIP IN GRAPH FORM

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

- 100 200 300 400 500 600 700 800

Sale

s in

Break-evenpoint

Total expenses

Total sales

Profit area

Loss are

a Fixed expenses

Units Sold

APPLICATION OF CVP ANALYSIS

CVP can also be applied to decisions by manufacturing, service and non-profit org.

CVP can be useful in pricing decisions in banking industry.

Governmental agencies use the analysis to determine the level of service appropriate for projected revenues

Real estate/construction ventures have used this technique to explore pricing, lender choice, and project scope options.

Part – 2Absorption

Costing

ABSORPTION COSTING:-

A costing technique that includes all manufacturing costs, in the form of direct materials, direct labour, and both variable and fixed manufacturing overheads, while determining the cost per unit of a product. It is also referred to as the full- cost technique.

COSTS ARE INVOLVE IN ABSORPTION COSTING

Direct material cost Direct labour cost Variable Manufacturing Cost Variable Sales Costs Fixed Manufacturing Overhead Fixed Selling Costs

ADVANTAGES

It recognizes the importance of fixed costs in production.

This method is accepted by Inland Revenue as stock is not undervalued.

This method is always used to prepare financial accounts.

CONTI…

When production remains constant but sales fluctuate absorption costing will show less fluctuation in net profit .

Unlike marginal costing where fixed costs are agreed to change into variable cost, it is cost into the stock value hence distorting stock valuation.

DISADVANTAGES

As absorption costing emphasized on total cost namely both variable and fixed, it is not so useful for management to use to make decision, planning and control.

As the manager’s emphasis is on total cost, the cost volume profit relationship is ignored. The manager needs to use his intuition to make the decision.

INCOME STATEMENT (ABSORPTION COSTING)

Particulars Rs. Rs.

Sales XXX

Production cost:Direct materialDirect labourVariable manufacturing OHFixed manufacturing OH

XxXxXxXx

Cost of production XXX

Add: Opening stock of finished goods(valued at a cost of previous period’s production)

XXX

Less: Closing stock of finished goods(valued at a cost of current period’s production)

XXX

Cost of goods sold XXX

XXX XxXx

Total cost XXX

Profit XXXX