Cost Volume Profit Analysis In Business Management

Cost volume profit analysis is a way for a fast answer for a number of significant questions about the profitability of an organization's products or services. Cost volume profit analysis can be used with either a products or service businesses such like health care, auto repair, beauty shops, barbers, etc.). It involves three elements:
• Cost: the cost of manufacturing of the product or providing a service
• Volume: the number of units of the produced products or hours/units of the delivered service.
• Profit: “Operating Profit = Selling Unit Price of product/service - Cost to produce a product or to provide service”

The primary two items are the existing information to business managers about their current business, products and services

Successful business can also be built around hundreds or thousands of profitable products. Several businesses start small and develop over time, adding products as they get more experience and are capable of identifying and/or developing new products and markets. Regardless the size of the business or number of products, the same directions apply. Each product must "carry its own weight" to build a profitable business.

Using cost volume profit analysis business managers can examine a single product, a group of products, or assess the entire business as a whole. Working across the entire production line in this way gives them a powerful means to analyze financial information. It offers them with daily techniques that are simple to understand and easy to use. Math is very simple with simple formulations. Just simple equations that can be easily adjusted to analyze a variety of situations.

Cost is defined as product cost, labor, overhead, consisting of materials, etc. Volume is identified as quantity of units of sold products in a period of time. Profit is the (per unit/total) selling price minus cost. Generally, the greater the volume, the greater the total profit. The full cost of a product consists of labor materials and manufacturing overhead. Managers stress on income statement accounts because these are affected by day-to-day operating

“CM = Selling Price - Variable Costs”. It can be considered as either unit contribution margin or total contribution margin. Contribution margin is the profit available to cover fixed costs & produce net income to the owners. The contribution margin can also be viewed as a percentage or ratio. To compute the contribution margin ratio, divide CM by the Selling Price.

One of the first applications of variable costing is computing the break-even point. This is the point at which sales just equal to the total costs. It can be defined as either units or sales dollars. Break-even units is the number of units required to cover fixed costs for a period of time. Cost volume profit analysis simplifies the calculation of breakeven in break-even analysis, and more generally provide simple computation of target income sales. It simplifies analysis of short run trade-offs in operational decisions.

Cost volume profit analysis enables managers to be capable of answering specific realistic questions needed in business analysis. Questions such as what the company's breakeven point is support manager’s project with spending forecasts and how production will contribute to the success or failure of the