The cost of production and the volume of sales are the determinant determinants of profit. The analysis of the behavior of costs on the variable volume of sales and its impact on profits is very important to determine a company's interruption level. The level at which the total revenue is equal to the total cost is said to be an equal level of the break, where there is no profit or no loss. Sales outside the disintegration volume result in profits. Generally, production is preceded by the process of forecasting demand, the production volume being determined, the production of which is absorbed by the market. Prices and promotions arrive later. Costs are used to forecast the production costs and the profits of different profit-making activities.
CVP Analysis or Cost-Volume Profit Analysis helps the company study the interaction between the three factors and their impact on pure profit. The process also includes an analysis of external factors influencing production volumes, such as market demand, competitive threats, and internal factors such as infrastructure, capital, and labor availability. This is a CVP analysis for managers to find bottlenecks that inhibit productivity and find a way out by adjusting activity levels or costs.
Pricing is the most important factor that makes the product competitive. Production costs can be fixed costs, variable costs and semi-variable costs. Fixed costs remain constant and generally do not affect the output volume change. While variable costs change directly with output volume and half variables, as its name implies, they are partially captured and partly variable. Accountants of the modern era fully support cost accounting for variable costs and their profits are listed as follows:
- Variable cost accounting is about the contribution key, which is the surplus of sales overheads. If this is high enough to cover the fixed costs, the profits can be provided to the company. This is a key factor in determining the percentage of profit.
- Variable costing only assigns costs to a product that changes directly to different production levels, helping to distinguish between sales profits and changes in production and inventory.
- Costs need to be allocated in a fixed and variable way to provide information to reflect cost-to-profit relationships and facilitate management decision making and control.
Some variable-cost applications that make decision making easier:
- Profit Planning: Increasing sales volumes or lowering sales prices.
- Performance Evaluation of Profit Centers: As the sales department, marketing department, product family, etc.
- Defining Product Priorities: Considering Market Potential and Profitability
- Make or Buy decisions: capacity and sales demand. Flexible budgeting and cost control is possible with a variable costing method and the striking feature of fixed cost management where time costs are valued and not distributed across all departments and products allows the company to understand the movement of profits in a direction similar to sales. Although it is a controversial technique, and with conventional cost reduction methods, such as absorption cost accounting, it is believed that it remains and exists in the next step in the evolution of cost accounting.
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