Cost-Volume-Profit Graph
In Management Accounting, it is very important to find out how cost and profits vary in relation to changes in volume, i.e., quantity of the product manufactured and sold. This relationship is usually found to be linear, which means that if the graph is drawn with volume on X-axis and cost or profits on the Y-axis, the graph will be a straight line.
The linear relationship arises from the three assumptions, namely:
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Cost is classified as fixed cost and variable cost. Fixed cost remains the same even if the volume changes, for example, factory rent. On the other hand, variable cost varies in direct proportion to the level of activity. If the volume of production increases variable cost also increases. For example, if the cost of the production increases by 10%, then the raw material also increases by only10%.
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The selling price remains the same even if the volume varies.
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There is only one product. If there is more than one product, then the product mix is assumed to be constant.
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