Assumptions of CVP Analysis

Following are the important assumptions of cost-volume-profit analysis:

• The analysis presumes that all costs can be easily divided into fixed and variable costs.

• It presumes the ability of predicting cost at different levels of activity or volumes.

• A series of break even charts are necessary when the alternative pricing policies are considered.

• It assumes that variable cost fluctuates proportionally with volume.

• Efficiency and productivity is assumed to be constant.

• It presumes that production and sales are synchronized at a point of time or, in other words, changes in the opening and closing inventory levels will remain insignificant in amount.

• Prices of the input factors are assumed to be constant.

• Analysis assumes that the influence of managerial policies, technology and efficiency of men, material and machines will remain constant and cost control will be neither strengthened nor weakened.

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