Empirical Study on Company Financial Performance with CVP Analysis

ZHANG Xishuan, CHENG Huifang School of Economics and Management Henan Polytechnic University, P.R.China, 454003 zhangxishuan@hotmail.com Abstract: In order to verify the establishment of CVP (Cost-Volume-Profit) analysis in real environment, the paper uses the financial data of 355 listed companies, and empirically analyzes the relationship of profit, volume and cost, and finds: among the three factors, there exists significant linear relationship, volume and profit is positively correlated, while cost and profit is negatively correlated. In the regression model of profit to volume and cost, there is no significant difference between the coefficient of volume and 1, also there is no significant difference between the coefficient of variable costs and -1. All these are consistent with the equation of CVP analysis. But the coefficient of fixed costs is bigger than -1, which is not consistent with CVP analysis. Key words: CVP analysis, Empirical study, Listed company, T test, Regression model

1 Introduction
The CVP analysis is the abbreviation for the relationship analysis of cost-volume-profit, it refers to a quantitative analysis method which is based on cost behavior analysis, and uses mathematical model of accounting and schema to reveal the internal laws of fixed costs, variable costs, sales price, sales volume, profits and other related variables, it can provide the necessary financial information for accounting prediction, decision-making and planning. Its basic formula is: Profit = Sales price per unit Sales volume - Variable costs per unit Sales volume - Fixed costs = Sales revenue - Variable costs - Fixed costs (1) With this approach, enterprises can predict the only amount of sales of their products to the break-even, or forecast how much profit can be got in a certain amount of sales, or forecast the amount of products must be soled in order to obtain a certain profit, as well as the amount of price of products must be reduced in order to expand sales volume. At present, whether in the West or China, the applications of CVP analysis are very wide-ranging. Then what is the true relationship among the profit, volume and cost in enterprises? Whether the true relationship among the three elements is consistent with the CVP analysis theory? This paper conducts an empirical study on it.

3 The Design of Empirical Study

3.1 Research method The paper mainly discusses the relationship of profit and cost, volume, so we firstly will analyze the correlation of profit and costs, the correlation of profit and volume. If we find that the correlation is very weak, or even none, then the following analysis is not necessary. But if we find that there indeed exists correlation between profit and costs, between profit and volume, then in order to explore whether the real relationship of profit and cost, volume is consistent with the expected in CVP analysis, we will collect some sample data, use multiple regression analysis technology of econometrics, and establish the regression model of profit to cost and volume, then compare it with the equation in the CVP analysis, and conduct related statistical test and analysis, thus we can judge whether the CVP analysis is divorced from reality, the following analysis in the paper is carried out along this line. 3.2 Variable definition According to CVP analysis theory, the involved variables in the empirical study mainly are corporate profit, sales volume, sales price, variable costs, fixed costs and etc.

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Speaking from financial statements, enterprise profit contains operating profit, total profit and net profit, etc. Total profit and net profit include investment income, non-operating revenue and expenses, subsidize revenue and others, while these have no relation to enterprises normal production and management, further more, these are not the research scope of CVP analysis. So selecting total profit and net profit as the represent of the index of enterprise profit is not proper, the operating profit which is most closely related to normal production and management is finally choose as the representative of the index of enterprise profit, with P said. In the CVP analysis, sales price and sales volume appear as two independent variables, but enterprises generally do not disclose their sales price and sales volume in the financial statements, it is very difficult to obtain such data. Further more, sales volume and sales price are often directly related to each other, separating their affection will be difficult. Therefore, the paper will not independently study the impaction of sales volume and sales price, but only considers the combined effect of sales volume and sales price, that is the impaction of sales amount on profit, sales amount is listed as prime operating revenue in financial statements, we can easily get it, and sales amount is represented by V in the paper. According to CVP analysis, costs in enterprises can be divided into two kinds: fixed costs and variable costs. But financial statements divide costs of enterprises into many categories according to usage, the main contents are as follows: operating costs, tax and associate charge, operating expenses, general and administrative expenses, financial expenses, non-business expenditure, other business expense, etc.. Non-business expenditure and other business expense have no direct relation with business volume, further more, they only have impaction on total profit and net profit, and have no impaction on operating profit. So in order to be consistent with the foregoing definition of profit, we do not consider these two costs. In the other kinds of costs, the operating costs and tax and associate charge directly relate with the size of business volume, thus variable costs will be represented by the sum of operating costs and tax and associate charge in the paper, with VC said. The remaining three costs: operating expenses, general and administrative expenses, financial expenses are not directly related to the size of business volume, belong to fixed costs, thus fixed costs are represented by the sum of operating expenses, general and administrative expenses, financial expenses in the paper, and with FC said. 3.3 Data sampling The classification of variable costs and fixed costs is most typical in manufacturing industry. So we choose data from manufacturing industry to analyze. Further more, the size of listed company is relatively big, its management is relatively standard, accounting information has high reliability, and data can be acquired through public channels, is relatively easy to be collected. So we choose listed companies of manufacturing industry as study object, and the data from the financial statements of these companies in 2006 is the analysis foundation(up to now, the financial statements of many listed companies in 2007 do not be published). Up to the end of 2006, the number of listed companies of manufacturing industry in Shenzhen Stock Exchange is 357. While the prime operating revenue and operating costs in financial statements in two companies are all zero, belong to obvious abnormality, and are not suitable to be selected into analysis sample, the two companies are Guangdong SUNRISE holdings Co. Ltd. (the stock code is 000030)and Chongqing international enterprise investment Co. Ltd.(the stock code is 000736). So the paper finally selects all 355 listed companies of manufacturing industry besides the two companies whose financial statements are abnormal. Through reading and data acquisition of related financial information of these 355 sample companies in 2006, we get the basic sample data. 3.4 Data resources The financial data of the 355 listed companies used in the paper mainly comes form CSMAR systems of Shenzhen GTA information technology Co. Ltd.. In order to verify it, we randomly extract some from the financial data, then compare it with the financial statements of listed companies, and no difference is found. In addition, a small portion of information comes from the official websites of related listed companies.

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4 Empirical Results and Analysis

We firstly finish the preliminary process of original data in accordance with the previous provisions in variable definition. Then the data is input into software SPSS15.0, and we use SPSS software to carry out related data processing and calculation (partial data operation cant be realized by SPSS, and the paper calculates it using Excel). 4.1 Correlation analysis We fist conduct general correlation analysis, and calculate the correlation coefficients (Pearson correlation coefficients) of profit with sales amount, variable costs and fixed costs, the results are as follows (see Table 1).
Correlation Coefficients of Profit with Various Factors Variable Index P V VC FC 1.000 0.583 0.535 0.190 Correlation Coefficient(P) 0.000 0.000 0.000 Significance(2-tailed) 355 355 355 355 Degree of Freedom Table 1

From the significance level, we can see that all the above correlation coefficients are significant, this illustrates that there is a strong interaction between profit and sales amount, variable costs, fixed costs. The statistical correlation shows, profit is positively correlated with sales amount, while profit is also positively correlated with costs, and this is easy to be understood. For generally speaking, greater costs show greater inputs, and greater inputs would lead to greater outputs, that is greater profit. Outwardly, this is not coincident with CVP analysis, for CVP analysis holds that profit has negative correlation with costs. In fact, there is no contradiction, because the negative correlation between profit and costs in CVP analysis has a prerequisite: the volume is invariant, while here obviously lacks of this prerequisite. To prove this point, we calculate the partial correlation coefficient between profit and costs under same sales amount, the results are as follows (see Table 2).
Table 2 Partial Correlation Coefficients* Variable Index P VC 1.000 -0.665 Correlation Coefficient(P) 0.000 Significance(2-tailed) 0 352 Degree of Freedom * Control variable is V. FC -0.565 0.000 352

We can see from the above table that profit has a negative correlation with costs after rejecting the influence of volume, which is coincided with CVP analysis. Besides, according to CVP analysis, the impaction of variable costs on profit is same as the impaction of fixed costs, so the correlation coefficient between variable costs and profit should be same as the correlation coefficient between fixed costs and profit. But we find that the correlation coefficient between variable costs and profit is less than the correlation coefficient between fixed costs and profit, then if this difference has statistical significance? Therefore, we have a significant test of difference of correlation coefficient (T test), the results are as follows (see Table 3).
Index Value T 4.723 Table 3 Results of Significant Test Degree of Freedom Significance(2-tailed 352 0.000

The results of T test show that the significance level is very small (less than 0.01), that is, the two correlation coefficients have significant difference, the correlation coefficient between variable costs and profit is bigger than the correlation coefficient between fixed costs, this shows that correlation degree between variable costs and profit is not same as the correlation degree between fixed costs, the more important impact factor of profit is variables costs, while the impaction of fixed costs on profit is

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relatively small. 4.2 Regression analysis (1) Model specification According to CVP analysis, profit is linear with sales amount and costs, so their relationship can be expressed by econometrics as follows: P = 0 + 1 V + 2 VC + 3 FC + (2) Where, 0 , 1 , 2 and

are parameters to be estimated and

is stochastic disturbance.

In the model, the coefficient before sales amount ( 1 ) reflects the influence of sales amount on profit, so according to the CVP analysis theory,

should be equal to 1. Similarly,

reflects the influence

of variable costs on profit, 3 reflects the influence of fixed costs on profit, according to CVP analysis theory, these two parameters should be equal to -1. Therefore, after we get the estimated values of parameters in the regression model, we can test whether 1 is equal to 1, and whether 2 and 3 are equal to -1, thus we can learn the establishment of CVP analysis in practice, and get the actual relationship among profit, cost and volume. (2) Regression results and analysis According to econometrics model (2) and using multiple linear regression tools of SPSS, we can get the following regression results by using ordinary least square method (see Table 4, Table 5).
Index Value R Square 0.999 Table 4 Model Summary Adjusted R Square F 0.999 137518.987 Significance(F) 0.000

(Constant) V VC FC

Table 5 Regression Coefficients Unstandardized Coefficients Standardized T Coefficients B Std. Error Beta 1146562.168 1.608 1843595.661 0.002 9.370 488.581 0.999 0.002 -7.987 -430.305 -0.998 0.003 -1.039 -389.515 -0.983

Significance (T) 0.109 0.000 0.000 0.000

According to econometric theory and the reality of this empirical study, the constant term does not have a clear economic implication, so in the following analysis, we will no longer consider the constant term. From Table 4 we can see: the coefficient of determination(R square, adjusted R square) is very big. In addition, F value of general significance test is great, and the corresponding significance is very small, closes to zero. All these show that the regression model is significantly established on the whole. That is, there exists significant linear relationship among profit, sales amount, variable costs and fixed costs, which is same with the theoretical model of CVP analysis. From Table 5 we can see: the significance level of each variable in regression model is smaller than 0.01 (not include constant term), this shows that the influences of sales amount, variable costs and fixed costs on profit are all high significant. 4.3 Hypothesis test In order to judge whether the coefficient before sales amount ( 1 ) in the regression model is equal to 1, and whether the coefficients before variables costs and fixed costs ( 2 and 3 ) are equal to -1, we must carry out the corresponding T test. Referring to hypothesis test theory, we calculate out corresponding test results by Excel, as the table below shows (see Table 6).

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Variable Coefficient T value Significance(2-tailed)

Table 6 Results of T Test* V VC 0.999 -0.998 -0.456 0.847 0.649 0.398

FC -0.983 6.901 0.000

*Notes: The T value and corresponding significance level of sales amount are got when testing whether is equal to 1, that is the null hypothesis of test is:

1 =1, the alternative hypothesis is: 1 1; 2

is equal

The T value and corresponding significance level of variable costs are got when testing whether to -1, that is the null hypothesis of test is:

2 =-1, the alternative hypothesis is: 2 -1; 3

is equal to

The T value and corresponding significance level of fixed costs are got when testing whether -1, that is the null hypothesis of test is:

3 =-1, the alternative hypothesis is: 3 -1.

For the hypothesis test of the coefficient 1 , the T value is -0.456, and the corresponding significance level is 0.649, is much bigger than 0.01, so in the significance level 0.01, in the regression model the coefficient before sales amount has no significant difference with 1, in the statistical sense, the coefficient before sales amount can be considered is 1. For the hypothesis test of the coefficient 2 , the significance level is 0.398, so the coefficient before variable costs in each model has no significant difference with -1, in the statistical sense, it can be considered that 2 =-1. For the hypothesis test of the coefficient 3 : H 0 : 3 =-1, H 1 : 3 -1, the T value is 6.901, and the corresponding significance level is 0.000, which is smaller than 0.01 and also smaller than 0.05, so whether in the significance level 0.01 or 0.05, the coefficient of fixed costs in the regression model is significantly different from -1, further more, the absolute value of 3 is smaller than 1, this shows the influence of fixed costs on profit is smaller than variable costs. So to profit, the two factors (variable costs and fixed costs) are not same important, this is not in accordance with CVP analysis, so CVP analysis exaggerates the influence of fixed costs on profit. This conclusion is in accordance with the findings in the previous correlation analysis, thus the both results can be confirmed, it shows fully that the influence of variable costs on profit is bigger, while the influence of fixed costs on profit is relatively smaller.

5 Conclusion
CVP analysis is an important theory in modern management accounting, but its conclusions are made in some strict assumptions, and we can not sure the conclusions are also set up in real environment, so studying whether the conclusions are tenable in real environment has great value. This paper selects 355 listed companies, and uses their financial data in 2006, empirically studies the relationship among cost, volume and profit, and finds that: there exists significant linear relationship among cost, volume and profit, volume and profit is positively correlated, while costs and profit is negatively correlated, but the correlation coefficient of variable costs and profit is significantly bigger than the correlation coefficient of fixed costs and profit. In the regression model of profit to cost and volume, the coefficient before volume has no significant difference with 1, and there is also no significant difference between the coefficient of variable costs and -1, which are consistent with the theoretical equation in CVP analysis, but the coefficient of fixed costs is bigger than -1, that is the influence of fixed costs on profit is smaller than the influence of variable costs on profit, and this is not in accordance with CVP analysis. On the whole, CVP analysis which is got in an ideal state is also set up in the real environment, but for profit, the status of variable costs and fixed costs are not same.

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References
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