Limitations of cvp analysis Essay

In all clientele it is very obvious for questions like, what effect on wampum can it expect if it incurs more than products? What quantity of products and services must a line of descent sell in society to chisel in even for the year? What happens to the breakeven operate of the stage business if it decides to add or addition the quantity of a product or services they currently offer? to arise. The analytic technique that helps the managerial accountants to address these questions is called cost Volume profit depth psychology. (Tata McGraw-Hill, 2008 p.298). It provides with racy study about the effect of tax income brocaded and the cost incurred at bottom a definite business. CVP compend can also be exampled to analyse the effect on profit due to changes in prices, costs, tax, interests and the im sashay of product sold by the organisation. (Tata McGraw-Hill, 2008 p.298).CVP depth psychology is used by the managers in sidereal day to day basis in rear to run th e business smoothly. Correct use of this can lead to a exposit understanding of what actions should and can be taken in order to save the business from facing any loss, and make profit or at least break even. CVP analysis is a helpful pecker for the management but it also suffers with somewhat limitations. It provides the management with the insight of the current face of the business and also reflects any potency problems the company could face in a short run. CVP graph directs managements attention to this situation but is not able to provide a effect to any potential problem within the business. (Tata McGraw-Hill, 2008 p.303).Many assumptions should be made in order to produce a CVP analysis such as, keeping the total revenue elongated which means the price or product or service result not change as gross revenue changes, keeping total expense linear which means the total fixed and the unit of measurement variable expense mud unaltered as activity varies, the efficienc y and productivity remains constant and the sales mix in a multi products company remains constant. (Tata McGraw-Hill, 2008 p.314). All these assumptions argon very some(prenominal) 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 unconscious process but also has some limitations. elongationTata McGraw-Hill (2008) Managerial Accounting Creating Value in a Dynamic Business Environment. cutting Delhi, Tata McGraw-Hill Publishing Company Limited.