(a) ASSUMPPTION OF CVP ANALYSIS

1. All costs can be classified as fixed and variable

while developing and applying cost-profit-analysis including the break-even analysis, it is
assumed that all costs can be classified into fixed and variable costs. In fact, it is difficult
to identify each and every cost element as fixed and variable. In the traditional type of
recording costs, it is very difficult to segregate costs into fixed and variable. Moreover,
the flexible policy of the company also makes it more difficult to identify the cost as
fixed and variable.
If anyone fails to identify the cost as fixed and variable, the application of cost-volume-
profit analysis becomes almost impossible.

2. Behavior or costs will be linear within the relevant range
Cost-volume-profit (CVP) analysis assumes that total fixed costs do not change in the
short-run within the relevant range. Total variable costs are exactly proportionate to
sales volume. But in reality, cost behavior may not remain constant.

3. Difficulty of steps fixed costs
Relevant range for many costs is very short. In that case it becomes very uncomfortable
to compute the required volume because it is difficult to say that which the relevant
range for our needed volume is.

4. Selling price remains constant for any volume
Indeed, most often quantity discount is offered for different lots of purchase. This
causes difficulty in determining the contribution margin per unit(CMPU) and
contribution margin ratio.

5. There is no significant change in the size of inventory
Application of cost-volume-profit (CVP) analysis is possible only under following two
situations:
* Either the company should follow variable costing for the inventoriable product cost.
* Or all the production volume should be sold within the same period.

6. Cost-volume-profit (CVP) analysis applies only to a short-term time horizon
CVP analysis is a short term planning tool, because nothing remains stable in the long-
run. In the condition of changing variables, all equations of CVP analysis need
readjustment of figures.

(b) Six Key Purposes of Budgets
A method of planning the use of resources
A vehicle for forecasting
A means of controlling the activities of various groups within the firm
A means of motivating individuals to achieve performance levels agreed and set.
A means of communicating the wishes and aspirations of senior management
A means of resolving conflicts of interest between groups with the organization.

x y xy X
2

500 80 40,000 250,000
800 120 96,000 640,000
700 100 70,000 490,000
650 95 61,750 422,500
650 94 61,100 422,500
500 82 41,000 250,000
640 90 57,600 409,6000
4,440 661 427,450 2,884,600


B= nxy - xy
n (x
2
) (x)
2

(7*427,450) (4,440*661) = 2,992,150 2, 934,840 = 57, 310
(7*2,884,600) (4,440)
2
20,192,200 19,713,600 478, 600

B = 0.1197

A= y - bx = 661 0.1197(4,440) = 661 531.6 = 129.33 = 18.48
n 7 7 7

Y = 18.48 + 0.1197x

(ii) y = 18.48 + 0.1197(620)
=18.48+74.214
= sh 92.694



(7*427,450) (4,440*661) = 2,992,150 2, 934,840
(7*2,884,600) (4,440)
2
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