The CVP analysis is generally made under certain limitations and with certain assumed conditions, some of which may not occur in practice. Following are the main limitations and assumptions in the costvolumeprofit analysis:
1. It is assumed that the production facilities anticipated for the purpose of costvolumeprofit analysis do not undergo any change. Such analysis gives misleading results if expansion or reduction of capacity takes place.
2. In case where a variety of products with varying margins of profit are manufactured, it is difficult to forecast with reasonable accuracy the volume of sales mix which would optimize the profit.
3. The analysis will be correct only if input price and selling price remain fairly constant which in reality is difficulty to find. Thus, if a cost reduction program is undertaken or selling price is changed, the relationship between cost and profit will not be accurately depicted.
4. In costvolumeprofit analysis, it is assumed that variable costs are perfectly and completely variable at all levels of activity and fixed cost remains constant throughout the range of volume being considered. However, such situations may not arise in practical situations.
5. It is assumed that the changes in opening and closing inventories are not significant, though sometimes they may be significant.
6. Inventories are valued at variable cost and fixed cost is treated as period cost. Therefore, closing stock carried over to the next financial year does not contain any component of fixed cost. Inventory should be valued at full cost in reality.
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2010
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February
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 VARIANCES ANALYSIS PRACTICE QUESTIONS
 Sales mix and quantity variances
 Sales mix and quantity variances
 Materials mix and yield variances
 The significance of variances
 Interdependence between variances
 Reasons for variances
 Selling price variance
 The fixed production overhead variances
 Fixed production overhead variances
 Variable production overhead total variances
 Variable cost variances
 Variance Analysis
 Variance Analysis
 Summery on Break Even Analysis
 Profit Graph
 Profit Graph
 Breakeven Point in Sales Revenue
 Multiple Product Situations
 Multiple Product Situations
 Limitations and Uses of Breakeven Charts
 Uses of Breakeven Chart
 Construction of a Breakeven Chart
 Breakeven Analysis Graphical Presentation
 Problems Related with Break Even Analysis
 Marginal Cost Equations and Breakeven Analysis
 Sensitivity Analysis or What If Analysis and Uncer...
 Chartered Certified Accountant (ACCA)  Profession...
 What is ACCA ?
 Sensitivity Analysis or What If Analysis and Uncer...
 Limitations of CostVolume Profit Analysis
 Limitations of CostVolume Profit Analysis
 Assumptions and Terminology of CVP
 Objectives of CostVolumeProfit Analysis
 CostVolumeProfit (CVP) Relationship
 MARGINAL COSTS, CONTRIBUTION AND PROFIT
 Chapter 3 – Breakeven Analysis

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February
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Friday, February 12, 2010
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