Companies must earn profits to stay in business. Managers want to increase profitability and therefore need to predict how their actions will affect profits. For example what will happen to profits if increasing promotional efforts by PhP 250 000 increases sales by 50 000? Managers also are concerned with questions such as the following: how many units must we sell to earn PhP 50 000? What selling price should we set? Should we hire another salesperson? Would staying open another two hours each day be profitable?
Cost-Volume-Profit analysis helps managers plan for change and answer questions. Cost-Volume-Profit (CVP) analysis is a method for analyzing the relationships among costs, volume, and profits. Managers use these relationships to plan, budget, and make desicions. The first step in CVP analysis is classifying cost according to behavior.
Classifying costs according to behavior is distinctive to managerial use of accounting information. In financial accounting reports prepare for external use, costs normally are grouped according to the functional areas of business: production (cost of goods sold), marketing (selling expenses), administration (general and administrative expenses), and financing (interest expense). A functional classification does not provide the necessary information to predict what is likely to happen to costs and profits if circumstances change, and a manager must plan for change and take actions to make changes.
This site will provide an overview on how such decisioning process will be made and the analytical techniques to be used in making short term decisions. However a more extensive review is needed to further understand the CVP analysis.