# ACCA F5 - Cost Volume Profit Analysis

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Changes in the cost and volume of a product have an effect on the net income from an investment or production. Having a proper understanding on how these two increase or decrease profits can help put your business on the map. Test out how well you understand them by taking this quiz.

• 1.

### Also known as CVP analysis, or cost-volume-profit analysis. _____ - _____ analysis is the study of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity and mix.

break-even
Explanation
Break-even analysis is the study of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity, and mix. It helps businesses determine the level of sales needed to cover all costs and achieve zero profit, also known as the break-even point. By analyzing these factors, businesses can make informed decisions about pricing, cost control, and sales volume to maximize profitability.

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• 2.

### CVP analysis is a particular example of ‘what if?’ analysis. A business sets a budget based upon various __________ about revenues, costs, product mixes and overall volumes. CVP analysis considers the impact on the budgeted profit of changes in these various factors.

assumptions
Explanation
CVP analysis involves making assumptions about various factors such as revenues, costs, product mixes, and overall volumes. These assumptions are used to set a budget and the analysis then considers how changes in these factors can impact the budgeted profit. By examining different scenarios and their potential effects on profit, CVP analysis allows businesses to make informed decisions and evaluate the financial implications of different choices.

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• 3.

### Cost _________ is affected by the interplay of a number of factors. Physical volume is only one of these factors; others include unit prices of input, efficiency, changes in production technology, wars, strikes, legislation, and so forth. Any CVP analysis is based on assumptions about the ________ of revenue, costs and volume. A change in expected _________ will alter the break-even point; in other words, profits are affected by changes in other factors besides volume.

behaviour
Explanation
The correct answer is "behaviour". The cost behaviour is affected by various factors such as unit prices of input, efficiency, changes in production technology, wars, strikes, legislation, etc. CVP analysis is based on assumptions about the behaviour of revenue, costs, and volume. A change in expected behaviour will impact the break-even point and profits, indicating that factors other than volume can influence profitability.

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• 4.

### A CVP chart must be interpreted in the light of the limitations imposed by its underlying ___________. The real benefit of preparing CVP charts is in the enrichment of understanding of the interrelationships of all factors affecting profits, especially cost behaviour patterns over ranges of volume.

assumptions
Explanation
A CVP chart must be interpreted in the light of the limitations imposed by its underlying assumptions. These assumptions are the basic principles or conditions upon which the CVP chart is built. They include assumptions such as the linearity of costs and revenues, constant sales mix, and fixed costs. Understanding these assumptions is crucial for accurately interpreting the CVP chart and making informed decisions based on it. By preparing CVP charts, businesses can gain a deeper understanding of how different factors, particularly cost behavior patterns, impact profits across various volume levels.

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• 5.

### The following underlying assumptions will limit the precision and reliability of a given cost-volume-profit analysis.

• A.

The behaviour of total cost and total revenue has been reliably determined and is linear over the relevant range

• B.

All costs can be divided into fixed and variable elements

• C.

Total fixed costs remain constant over the relevant volume range of the CVP analysis

• D.

Total variable costs are directly proportional to volume over the relevant range

• E.

Selling prices are to be unchanged

• F.

Prices of the factors of production are to be unchanged (for example, material, prices, wage rates).

• G.

Efficiency and productivity are to be unchanged

• H.

The analysis either covers a single product or assumes that a given sales mix will be maintained as total volume changes

• I.

Revenue and costs are being compared on a single activity basis (for example, units produced and sold or sales value of production).

• J.

Perhaps the most basic assumption of all is that volume is the only relevant factor affecting cost. Of course, other factors also affect costs and sales. Ordinary cost-volume-profit analysis is a crude oversimplification when these factors are unjustifiably ignored

• K.

The volume of production equals the volume of sales, or changes in beginning and ending inventory levels are insignificant in amount.

• L.

Total fixed vary over the relevant volume range of the CVP analysis

• M.

Revenue and costs are being compared on a single or multi activity basis (for example, units produced and sold or sales value of production).

• N.

Total fixed costs vary over the relevant volume range of the CVP analysis

A. The behaviour of total cost and total revenue has been reliably determined and is linear over the relevant range
B. All costs can be divided into fixed and variable elements
C. Total fixed costs remain constant over the relevant volume range of the CVP analysis
D. Total variable costs are directly proportional to volume over the relevant range
E. Selling prices are to be unchanged
F. Prices of the factors of production are to be unchanged (for example, material, prices, wage rates).
G. Efficiency and productivity are to be unchanged
H. The analysis either covers a single product or assumes that a given sales mix will be maintained as total volume changes
I. Revenue and costs are being compared on a single activity basis (for example, units produced and sold or sales value of production).
J. Perhaps the most basic assumption of all is that volume is the only relevant factor affecting cost. Of course, other factors also affect costs and sales. Ordinary cost-volume-profit analysis is a crude oversimplification when these factors are unjustifiably ignored
K. The volume of production equals the volume of sales, or changes in beginning and ending inventory levels are insignificant in amount.
Explanation
The given answer lists the underlying assumptions that will limit the precision and reliability of a cost-volume-profit analysis. These assumptions include: the behavior of total cost and total revenue being linear over the relevant range, the ability to divide all costs into fixed and variable elements, constant total fixed costs over the relevant volume range, direct proportionality of total variable costs to volume, unchanged selling prices and prices of factors of production, unchanged efficiency and productivity, analysis covering a single product or assuming a maintained sales mix, comparison of revenue and costs on a single activity basis, volume being the only relevant factor affecting cost, and the volume of production equaling the volume of sales or insignificant changes in inventory levels.

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• Current Version
• Mar 20, 2023
Quiz Edited by
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• Oct 05, 2011
Quiz Created by
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