Cost-Volume-Profit Analysis Answers

Part A

Question 01

A company can study the relationships between cost, volume and profit using Cost - Volume – Profit analysis.

It is need to bare a cost for any kind of production that comprises variable, Fixed and mixed cost. In the Cost-Volume-Profit analysis all the costs are separate as Fixed and Variable costs.

Variable costs are directly proportional to the production volume (Number of units). Direct material cost and direct labor cost are examples for variable cost.

Fixed costs are constant and not change with the production volume. Rent and Insurance are examples for the fixed costs. There is not any direct relationship between the fixed cost and the production volume.

Mixed costs are constant up to specific level of production

If any variances are identified by the responsible parties should exercise the controls or revise the original budget. Monitoring and controlling the cost and operational efficiency to improve the income is the main responsibility of Budgetary controls.

Budget is a formal statement of the financial resources set aside for carrying out specific activities in a given period of time which helps to coordinate the activities of the organization.

Budgetary control helps to define the corporate objectives and fix responsibilities. It makes proper coordination and communication across the organization. Budgetary control leads to achieve economies of sale, efficiency and effectiveness which increases the profitability by waste reduction. Since budgetary controls continuously monitor the operations of organization, it can take immediate actions for correct the variances or take prompt action to set new standards.

Budgetary controls helps to plan, communicate and delegate the activities of an organization and allocate the resources which required to achieve the desired result. It also monitor and measure the performance of an organization to identify the variations and takes corrective actions for achieve the

Helps to study the changes in profit against the changes in cost and volume.

Helps to short term decision making.

Provide easy calculation method.

Can be applicable to the production mix.

In the Break even point analysis we have to made some assumptions as follows,

All the cost can be separated in to Fixed & variable costs. But in the real process it is not possible.

Break even point assumes that the Fixed cost of the production is constant at all the volume of the production. But fixed cost is constant only for the certain level of production volume.

Break even point assumes that the production volume and the sales volume are equal.

Break even point does not consider the capital employed to the business.

Variable cost is proportional to the production volume but for all the time that may not be directly proportional.

Break even point assumes that all the cost and the prices are constant for the period is not