Cost volume profit analysis (CPV) is an accounting technique applied in business management to determine how various alterations in cost together with volume influence the operating income as well as net income of a company (Drury, 2013). In conducting the analysis, some assumptions are put into place. They include:
The variable costs are all constant.
Every product which is produced is sold.
The sales price per unit is constant
The costs are only affected when there is a change in an activity
The total fixed costs are constant
When a business sells more than a single product, the products are sold in the same mix.
The assumptions in CPV are valid when handling a small business. For a larger business, they may not hold. Companies often produce different products with each product having particular selling price, contribution margin ratios and contribution margin as well. The total fix cost will be the same despite the selling of multiple products. This makes it complicated to perform CPV in various products. However, CPV analysis applies to numerous products when the knowledge of mix product is applied in the calculation (Drury, 2013).
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Process Costing
The term process costing as used in cost accounting is a tool which is used in describing one method of collecting an assigning the costs of manufacturing to the produced units. It is used when almost identical units are produced in mass (Edmonds, Edmonds, and Tsay, 2016). Process costing differs from job order costing in that, job order costing system is only applied when the manufactured goods are sufficiently different from one another. Whereas when the products are similar or nearly similar, the process costing is applied.
Process costing can be applied to businesses which deal with manufacturing processes. For example, companies which manufacture petroleum products, paints. A business can use both job order costing and process costing. This is because there are situations in which a business has mixed production system which is producing goods in large quantities, but it customizes the finished goods before shipping. In this case, it appropriate to apply both job order costing as well process costing (Edmonds, Edmonds, and Tsay, 2016).
References
Drury, C. M. (2013). Management and cost accounting . Springer.
Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental managerial accounting concepts . McGraw-Hill Education.
