Cost Volume Profit (CVP) Analysis: Application: Application and Limitation in Business Planning
Confidence Joel Ihenyen PhD, Akpe Oyinkarebai Michael
Abstract
Cost-Volume-Profit (CVP) analysis is a vital financial tool used in managerial accounting to understand how changes in costs and volume affect a company's operating profit. This study explores the application and limitations of CVP analysis in business planning, particularly its role in supporting strategic decisions such as pricing, production volume, budgeting, and product mix selection. By identifying the relationships among fixed costs, variable costs, sales volume, and profit, CVP provides managers with actionable insights for short-term planning and performance evaluation. Despite its wide applicability, the study highlights several limitations inherent in CVP analysis. These include its assumption of linearity in cost behavior, constant sales price, and a single-product environment all of which may not reflect real-world complexities. Moreover, the model's reliance on historical data and its short-term focus restrict its usefulness in dynamic business environments where external factors such as inflation, market competition, and technological change can significantly influence outcomes. Multi-product firms and businesses with fluctuating cost structures may find CVP less accurate and potentially misleading if not adjusted appropriately. The findings suggest that while CVP analysis remains a valuable tool in business planning, its effectiveness depends on the context in which it is applied. Managers are advised to use CVP in conjunction with other strategic planning tools and to regularly reassess assumptions to ensure relevance and accuracy.
Keywords
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