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Presentation on

CVP Analysis
&
Absorption Costing
Presented
by :-

Khushang
Desai

vidit
Bhavasar
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……
qCVP 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:-
qPrice of products
qVolume or level of activity
qVariable cost
qTotal fixed cost
qMix of product sold
Objectives of CVP analysis
qIt is essential to ascertain the
relationship between cost and profit on
one hand and volume on the other.
q

qIt is helpful in setting up flexible budget


which indicates costs at various level
of activity.
q

qTo assist in evaluating performance for


purpose of control.
q

qIts helps to management in formulating


Assumptions of CVP analysis
qSelling price is constant.
q
qTotal fixed cost and variable cost per unit is
constant.
q
qThe sales mix is constant in multi-product
companies.
q
qInventory 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-V
X is break even

 SP is selling price
 V is variable cost
 TFC is total fixed cost

CVP relationship in graph form

450,000
Break-even Total sales
400,000 point
e a
350,000 a r
i t
o f
Pr
300,000

250,000
Total expenses
Sales in

200,000

150,000
a Fixed expenses
100,000 r e
a
s s
o
50,000
L
-
- 100 200 300 400 500 600 700 800

Units
Sold
Application of CVP Analysis
q CVP can also be applied to decisions by
manufacturing, service and non-profit org.
q
q CVP can be useful in pricing decisions in
banking industry.
q
q Governmental agencies use the analysis to
determine the level of service appropriate for
projected revenues
q
q Real estate/construction ventures have used
this technique to explore pricing, lender
choice, and project scope options.
Part – 2
Absorption
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

qDirect material cost


qDirect labour cost
qVariable Manufacturing Cost
qVariable Sales Costs
qFixed Manufacturing Overhead
qFixed Selling Costs
Advantages
qIt recognizes the importance of fixed
costs in production.
q
qThis method is accepted by Inland
Revenue as stock is not undervalued.
q
qThis method is always used to prepare
financial accounts.
q
Conti…
qWhen production remains constant but
sales fluctuate absorption costing will
show less fluctuation in net profit .
q
qUnlike marginal costing where fixed
costs are agreed to change into
variable cost, it is cost into the stock
value hence distorting stock valuation.

Disadvantages
qAs 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.
q
qAs 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: Xx
Direct material Xx
Direct labour Xx
Variable manufacturing OH Xx
Fixed manufacturing OH

Cost of production XXX


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

Less: Closing stock of finished goods XXX


(valued at a cost of current period’s production)

Cost of goods sold XXX


XXX Xx
Xx

Total cost XXX


Profit XXXX