 In this presentation, we will take a look at some of the cost volume profit analysis or CVP analysis assumptions. These are going to be some of the assumptions you've probably seen along the way. Some of the support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. The limitations that we see along the way in other words we see these items and say hey this isn't exactly how things are working we might have made some estimates oftentimes in some areas to simplify the process. Remember that when we consider the cost volume profit analysis we're doing projections oftentimes and oftentimes we're going to be using estimates we're not going to be exact in some areas and there's arguments that in some cases that non-exactness could cause major problems there's people that say that the CVP is not as beneficial as we might think in first glance because at first glance it looks great because we want to be able to put things down into a numerical format if we put things down into a numerical format as much as possible then our analysis is something that we can break down in a very efficient type of way but if we have to make assumptions that don't apply then we need to be mindful of those assumptions and we need to decide whether or not the application of the CVP analysis is going to be appropriate or not and or when it would be appropriate in what areas would it be most appropriate when would the assumptions that are there possibly be large enough for us to have concerns with or at least qualify some of our our information so just remember the idea here is CVP is going to be a tool we're going to go through some of the problems with it which are going to be some of the assumptions that are made that could cause problems and then we'll discuss some arguments for the CVP analysis some arguments as to why the assumptions and making them is may not be as big a deal so some of the assumptions that we have and we've pointed these out along the way that we can classify costs between fixed and variable costs so note what we've done is this is the first primary assumption we do with the managerial accounting with cost volume profit analysis we say hey we're not going to be grouping things by what they do for us in terms of expenses we're going to be grouping them by the behavior of the cost do they act as a variable cost do they act as a fixed cost because that's going to allow us to break out our income statement to a contribution margin income statement which is going to be the variable cost minus which is going to be the sales minus the variable costs and then think about the fixed costs as a separate section that's the whole basis that we're going to have to set up our our process in and we've noted earlier that we have some costs that are mixed this is not a perfect world there's no we're not going to be able to go through the income statement and say there's a perfect linear relationship that as the as our production goes up the costs will go up with some items with the variable costs and that other items are simply fixed and that's just what it is they never change note that's never exactly the case that's never going to happen almost and even the rent in terms of fixed costs will go up after a certain point in time because we're going to possibly need more property as we increase the sales volume so note that the these are huge huge kind of assumptions that we're making and we've talked about some methods that we can do to make these assumptions more clearly but note of course that's going to be a big assumption that we have and there's no simple way to do that if you're thinking about your financial statements and saying hmm how do I it's not as easy for me to break these out into variable costs and fixed costs well it's not because you're gonna have to make assumptions to do that and making those assumptions is one of the one of the steps that need to be taken to apply this tool and living with the problems that that come with that the possible errors that come with that is part of the cost of applying the tool as well next assumption that selling prices per unit variable cost per unit and fixed costs will be constant so again we're assuming that these things are going to be constant over time as well so the selling price note that we're basically if we're projecting out into the future we're not we can't it's we can't use this analysis if we're going to say well the sales price will be this much and then it'll go up in a week and then it'll go down it'll fluctuate all over the place it may fluctuate in real life we might make decisions to increase or decrease the sales price in the middle of the year in the middle of the month constantly and it could happen but we can't really make the analysis with that assumption being the case so one the sales price the variable costs in a similar fashion we're going to assume are going to be constant and and again we'll see some arguments why this is okay but just remember that there are arguments for and against this because of course depending on where we are the sales price could fluctuate quite a lot same with the variable costs and again the fixed costs you would think depending on the types of fixed costs we have like the rents you would think would be pretty fixed for a certain amount of time unless we needed more property but it could be variable at some given point as well and then we have a constant sales mix and we talked about if we had different inventory items and we were we were trying to figure out that the cvp type of analysis that we're considering a constant type of sales mix the ratio at which we sell our inventory so that we can then apply out this systematic numerical method and the sales mix changing it could be a significant factor it might not be a consistent sales mix we might sell a lot more of one product to another product and if we don't know what the sales mix is then it's going to be difficult for us to to assume you know a consistent sales mix in order to figure out the cost volume profit type of analysis so arguments for the cost volume analysis notice what we looked at of these assumptions and these assumptions are usually given as problems to the cost volume profit analysis note that in managerial accounting oftentimes there's a big drive to get things to be numerical because if we get things to be numerical they feel more exact we can use actual numbers as measurements whereas if we can't do things numerically we're kind of in the clouds we're kind of just guessing as to what you know what things work or not there's no there's no we can't really compare one thing to the other the more we can put things down in a miracle fashion the better off it looks to be however of course if the assumptions that we use to put things on paper are not you know applicable then the having them in a numerical form may not be as valuable as we as we would have thought and those assumptions are some arguments to say hey this isn't as valuable as you would have thought because of these assumptions now some arguments for against those assumptions and for the cost volume profit analysis and note as we make these arguments it's you think about this from a business by business perspective because cvp cost volume profit is not like financial account it's not required do we want to use this tool or don't we the question is does it provide us benefit to do so or not does the does the tool give us better decision-making on it so we have deviations from the assumptions are minor this is going to be one of the arguments that we could have we could say hey look there's going to be deviations we from the from the assumptions the the variable cost the fixed cost of breaking them out between variable and fixed but we could say hey the deviations we believe are going to be minor and possibly the deviations could go either way they could deviate one way and if we if we take all the minor deviations in our assumptions and net them together in other words it's quite possible they could net out and have a minor effect be in essence correct now again they could net out and they all could go the same way for some random reason it's just basically uh it could randomly be that way you know so it's but it also could be the fact that these small assumptions would be minor and the small assumptions then could be uh in such a fashion that they cancel themselves themselves out and therefore result in minor variations and therefore the cost volume profit analysis would be good because it's just an estimate and that's going to be one of the the key factors that we want to keep in mind here and that's going to be the last one cvp is an estimate so the fact that it's not going to be perfect the fact that we're making estimates the fact that we're making an estimate between variable cost and fixed cost and we're doing things a certain type of analysis to break out between variable cost and fixed cost well that's part of estimating if we're trying to project into the future we don't have any better way of doing it we've got to use something to project into the future using a numerical fashion making some type of estimates to do so is you know as good as we can do to to make to make those assumptions and you know breaking things out by behavior from that argument would be a reasonable a reasonable way to go the sales variable cost and fixed costs are often uh close to a straight line on a graph when assumptions are within a relevant range and this is this item that remember there was an assumption saying that we're assuming that the variable cost fixed costs and the sales are going to be constant and they could change note and that's true and it depends on industry but usually they're going to be fairly constant within a relevant range so in other words if we're talking about the production of inventory within a relevant range of units producing from this amount to to the NIS amount within a relevant range then you would think the sales would be relevant relatively constant within that relevant range if we go past that range you would you would see deviation and change the costs are probably more volatile we have more control over the sales so we can kind of predict what the sales will be we might make some little deviations depending on the industry we're in increasing and decreasing sales but you would think they would be fairly constant what our sales price is within a relevant range and then the variable costs could change too because we've noted that variable costs could have some some variation to them but the standard type of variations that we look at with most variable costs are usually can be approximated with a straight line fairly well within again a relevant range fixed costs in a similar fashion should are usually if they're a standard type of fixed costs like the rent are pretty solid within a relevant range but nothing is completely solid forever it's not it's not going to be the same forever the rent's not the same if we need to make a lot more units we're going to need more space and therefore more we have to buy more place to rent more so the rent could go up at that point in time but the assumption here being that it should be fairly constant within the relevant range so note in conclusion then when you talk about cost falling profit analysis people that really like it really favorite because they're numerically oriented generally and they want to come up with a numerical systematic approach to something also note however that there are problems with it and just because we have a numerical assumption doesn't mean that we shouldn't take into consideration those those problems with it if we just have just because we have a number that says something doesn't mean that we we have to know what that number means we have to say okay what are the limitations to the calculation that we have here and are they relevant to the number that we that we've come up with could they be a factor that could significantly flaw the numbers that we've come up with