Management Accounting Short Note-'Cost-Volume-Profit relationships'

Cost volume profit analysis is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship between cost, volume and profit in an organization by focusing on interactions among the following five elements:

1. Prices of products; 

2. Volume or level of activity; 

3. Per unit variable cost; 

4. Total fixed cost; and

5. Mix of product sold.

Because cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit it is a vital tool in many business decisions. These decisions include, for example, what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire.