The Assumptions Of Cvp Analysis

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Topic 1: Assumptions of CVP Analysis “The assumptions underlying Cost-Volume-Profit Analysis make it a difficult method to apply in real-world settings”. INTRODUCTION : In every business, Big or small, prediction is a wonderful thing. If anyway, we could find out our exact business profit with divine power, we would be able take perfect decision for our business and thus could maximize our profit. The reality is, naturally, such decision regarding maximizing profit to be made by estimation based on past experiences. Although cost management accounting doesn’t act like a crystal ball, but it can be helpful to provide decision to those questions regarding the after effect of different actions. One of the most important decision for any…show more content…
Instead of broad application, CVP analysis is also continuously criticized as it uses of its simplifying assumption, as for example linear cost or revenue function. In addition, CVP analysis is degraded for single product focus and also single time period analysis. Above this, the main problem with the CVP analysis arises when it face to applying in real world. All those problems centered around assumptions in which CVP analysis method based. Let’s have a look at all the assumptions & restriction or limitation one after one as we discuss below : ASSUMPTION 1: All Cost Can Analyze By Fixed & Variable Elements : In CVP analysis, whenever we deal with fixed cost & variable cost, we assume that it is considerable to analyze total cost and also can divided into variable & fixed cost heading. While, whenever we deal in real life with a large business organization, we will come across with numerous cost involve in total cost. Also forces acts on all those costs are countless. As a result analysis & division of those cost into variable & fixed is not as simpler as explained. Division of variable & fixed cost is usually a longer time consume process. And Techniques as for example inspection of accounts is really not
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