{"id":3496,"date":"2020-02-22T06:28:41","date_gmt":"2020-02-22T06:28:41","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3496"},"modified":"2020-02-22T06:28:41","modified_gmt":"2020-02-22T06:28:41","slug":"limitations-of-cost-volume-profit-analysis","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/limitations-of-cost-volume-profit-analysis\/","title":{"rendered":"LIMITATIONS OF COST VOLUME PROFIT ANALYSIS"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/limitations-of-cost-volume-profit-analysis\/#LIMITATIONS_OF_COST_VOLUME_PROFIT_ANALYSIS\" title=\"LIMITATIONS OF COST VOLUME PROFIT ANALYSIS\">LIMITATIONS OF COST VOLUME PROFIT ANALYSIS<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/limitations-of-cost-volume-profit-analysis\/#LIMITATIONS_OF_COST_VOLUME_PROFIT_ANALYSIS-2\" title=\"LIMITATIONS OF COST VOLUME PROFIT ANALYSIS\">LIMITATIONS OF COST VOLUME PROFIT ANALYSIS<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"has-text-align-center wp-block-heading\" id=\"limitations-of-cost-volume-profit-analysis\"><span class=\"ez-toc-section\" id=\"LIMITATIONS_OF_COST_VOLUME_PROFIT_ANALYSIS\"><\/span><strong>LIMITATIONS OF COST VOLUME PROFIT ANALYSIS<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"768\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/LimitationsofCVPAnalysis.jpg\" alt=\"LIMITATIONS OF COST VOLUME PROFIT ANALYSIS\n\" class=\"wp-image-5148\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/LimitationsofCVPAnalysis.jpg 1024w, https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/LimitationsofCVPAnalysis-300x225.jpg 300w, https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/LimitationsofCVPAnalysis-768x576.jpg 768w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><figcaption>LIMITATIONS OF COST VOLUME PROFIT ANALYSIS<br \/><\/figcaption><\/figure>\n\n\n\n<p><a href=\"https:\/\/commerceiets.com\/cost-volume-profit-analysis\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Cost\u2010Volume\u2010Profit Analysis (opens in a new tab)\">Cost\u2010Volume\u2010Profit Analysis<\/a> is the analysis of three variables viz. Cost, Volume and Profit, which explores the relationship existing amongst Costs, Revenue, Activity Levels and the resulting Profit.<\/p>\n\n\n\n<p><strong>ACCORDING TO\nCHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON<\/strong><\/p>\n\n\n\n<p>\u201cCVP the study of the effects on future profit of changes in\nfixed cost, variable cost, sales price, quantity and mix\u201d.<\/p>\n\n\n\n<p>The break-even point in any business is that point at which\nthe volume of sales or revenues exactly equals total expenses or the point at\nwhich there is neither a profit nor loss under varying levels of activity. The break-even\npoint tells the manager what level of output or activity is required before the\nfirm can make a&nbsp; profit; reflects the\nrelationship between costs, volume and profits. In another words breakeven\npoint is the level of sales or production at which the total costs and total\nrevenue of a business are equal. <\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong>Break-even sales = (Contribution at break-even point \/PV ratio)<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong>OR<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-center\"><strong>Fixed cost \/ PV ratio<\/strong><\/p>\n\n\n\n<p>At Break-even point or level, the sales revenues are just equal to the costs incurred. Below Break-even point level the firm will make losses, while above this level it will be making profits. This is so because that while the variable costs vary according to the variations in the volume or level of activity while the fixed costs do not change.<\/p>\n\n\n\n<h3 class=\"has-text-align-center wp-block-heading\" id=\"limitations-of-cost-volume-profit-analysis-1\"><span class=\"ez-toc-section\" id=\"LIMITATIONS_OF_COST_VOLUME_PROFIT_ANALYSIS-2\"><\/span>LIMITATIONS OF COST VOLUME PROFIT ANALYSIS<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Though break-even analysis has gradually become service tool for modern financial management, there are certain objections raised against the utility of break-even analysis or the limitations of cost volume profit analysis are: <\/p>\n\n\n\n<p>&nbsp;(i) Fixed costs do\nnot always remain constant. <\/p>\n\n\n\n<p>&nbsp;(ii) Variable costs\ndo not always vary proportionately. <\/p>\n\n\n\n<p>&nbsp;(iii) Sales revenue\ndoes not always change proportionately. <\/p>\n\n\n\n<p>&nbsp;(iv) The horizontal\naxis cannot measure the units sold in as much as many unlike type of products\nare sold by the same enterprise. <\/p>\n\n\n\n<p>&nbsp;(v) Break-even\nanalysis is of doubtful validity when the business is selling many products\nwith different profit margins. <\/p>\n\n\n\n<p>&nbsp;(vi) Break-even\nanalysis is based on the assumption that income is influenced by changes in\nsales so &nbsp;that changes in inventory would\nnot directly affect income. If marginal costing is used, this assumption would\nhold good but in other cases, changes in inventory will affect income because\nthe absorption of fixed costs will depend on production rather than sales. <\/p>\n\n\n\n<p>&nbsp;(vii) Condition of\ngrowth or expansion in an organisation are not assumed under break-even\nanalysis. In actual life of any business organisation, the operation undergoes\na continuous process of growth and expansion. <\/p>\n\n\n\n<p>&nbsp;(viii) Only a limited\namount of information can be presented in a single break-even chart. If we have\nto study the changes of fixed costs, variable costs and selling prices, a\nnumber of charts will have to be drawn up. <\/p>\n\n\n\n<p>&nbsp;(ix) Even simple\ntabulation of the results of costs and sales can serve the purpose which is\nserved by a break-even chart, hence there is no need of presenting the data\nthrough a break-even chart. <\/p>\n\n\n\n<p>(x) The chart becomes very complicated and difficult to\nunderstand for a layman, if the number of lines or curves depicted on the graph\nare large. <\/p>\n\n\n\n<p>\u00a0(xi) The chart does not provide any basis for comparative efficiency between different units or organizations. <\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/cost-accounting\/\">Cost Accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-cost-accounting-pdf\/\">Scope of cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/elements-of-cost\/\">Elements of cost<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/types-of-cost\/\">Types of cost<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/material-control-in-cost-accounting-pdf\/\">Material control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perpetual-inventory-system\/\">Perpetual inventory system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/pricing-of-materials\/\">Pricing of materials<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/bin-card\/\">Bin Card<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/store-ledger\/\">Stores Ledger<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/incentive-plans\/\">Incentive plans<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/overhead\/\">Overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/accounting-treatment-of-idle-time\/\">Idle time<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/system-of-wage-payment-in-cost-accounting\/\">System of wage payment in cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-time-rate-system-and-piece-rate-system\/\">Time rate vs piece rate wage system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-centre\/\">Cost Center<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/labor-turnover\/\">Labour Turnover<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Difference between management accounting and cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/allocation-and-apportionment-of-overheads\/\">Allocation and apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-allocation-and-apportionment-of-overheads\/\">Allocation vs Apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/\">Absorption of overheads<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/\">Over absorption and under absorption of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/activity-based-costing\/\">Activity based costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-traditional-costing-and-activity-based-costing\/\">Traditional costing vs ABC system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/reconciliation-of-accounts\/\">Reconciliation of accounts<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/unit-costing\/\">Unit costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-format\/\">Cost sheet format<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-vs-production-account\/\">Cost sheet vs production sheet<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/job-costing\/\">Job costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/batch-costing\/\">Batch Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-batch-costing\/\">job costing vs batch costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/contract-costing\/\">Contract costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-contract-costing\/\">Job Costing vs Contract costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/process-costing\/\">Process Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-costing-vs-job-costing\/\">Process costing vs job costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/joint-products\/\">Joint products<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/by-products\/\">By Product&nbsp;<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/equivalent-production\/\">Equivalent production<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/marginal-costing\/\">Marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/applications-of-marginal-costing\/\">Application of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-volume-profit-analysis\/\">Cost volume profit analysis<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/tools-and-techniques-of-marginal-costing\/\">Tools and techniques of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budget\/\">Budget<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/break-even-point\/\">Break even point<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-of-budgetary-control\/\">Process of budgetary control<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explain-the-advantages-and-limitations-of-budgetary-control\/\">Advantages and limitations of budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budgetary-control\/\">Budgetary Control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/zero-base-budgeting\/\">Zero base budgeting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/standard-costing\/\">Standard Costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/variance-analysis\/\">Variance Analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-standard-costing-and-budgetary-control\/\">Standard costing vs budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Management accounting vs cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-financial-accounting-management-accounting-and-cost-accounting\/\">Cost accounting vs financial accounting<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"512\" height=\"152\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg\" alt=\"LIMITATIONS OF COST VOLUME PROFIT ANALYSIS\" class=\"wp-image-4836\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg 512w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1-300x89.jpg 300w\" sizes=\"(max-width: 512px) 100vw, 512px\" \/><figcaption>LIMITATIONS OF COST VOLUME PROFIT ANALYSIS\n<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>LIMITATIONS OF COST VOLUME PROFIT ANALYSIS Cost\u2010Volume\u2010Profit Analysis is the analysis of three variables viz. Cost, Volume and Profit, which explores the relationship existing amongst Costs, Revenue, Activity Levels and the resulting Profit. ACCORDING TO CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS, LONDON \u201cCVP the study of the effects on future profit of changes in fixed cost,&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/limitations-of-cost-volume-profit-analysis\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;LIMITATIONS OF COST VOLUME PROFIT ANALYSIS&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":3499,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[187],"tags":[],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3496"}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3496"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3496\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/3499"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3496"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3496"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3496"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}