Limitations of cvp analysis Essay

In any business it is very frank for questions like, what effect on profit can it expect if it produces more intersection points? What cadence of products and services must a business sell in entrap to break even for the year? What happens to the breakeven point of the business if it decides to add or increase the quantity of a product or services they shortly offer? to arise. The analytical technique that helps the managerial accountants to address these questions is called Cost quite a little profit compendium. (Tata McGraw-Hill, 2008 p.298). It provides with vital information about the effect of revenue raised(a) and the cost incurred within a certain business. CVP analysis can withal be employ to analyse the effect on profit receivable to changes in prices, costs, tax, interests and the mix of product sold by the organisation. (Tata McGraw-Hill, 2008 p.298).CVP analysis is used by the managers in twenty-four hours to solar day basis in show to run the business smooth ly. Correct use of this can lead to a detailed understanding of what actions should and can be taken in swan to save the business from facing any loss, and make profit or at least break even. CVP analysis is a helpful musical instrument for the management however it also suffers with some limitations. It provides the management with the insight of the new position of the business and also reflects any potential problems the company could nerve in a short run. CVP graph directs managements worry to this situation but is not able to provide a reply to any potential problem within the business. (Tata McGraw-Hill, 2008 p.303).Many assumptions should be do in order to produce a CVP analysis such as, tutelage the total revenue linear which means the price or product or service will not change as sales changes, keeping total expense linear which means the total bushel and the unit variable expense remains unchanged as application varies, the efficiency and productivity remains constant and the sales mix in a multi products company remains constant. (Tata McGraw-Hill, 2008 p.314). All these assumptions are very oftentimes necessary in order to produce a CVP analysis but they are not necessarily constants in a day to day business. If by any reasons the sales mix changes in the business than a new CVP analysis should be made for thisnew sales mix. CVP analysis provides the management of any organisation with vital information that it requires for day to day operation but also has some limitations.ReferenceTata McGraw-Hill (2008) Managerial method of accounting Creating Value in a Dynamic Business Environment. New Delhi, Tata McGraw-Hill issue Company Limited.