CHAPTER ONE
INTRODUCTION
Cost volume profit analysis is a distinct or unique discipline in the study of management. The cost volume profit has various application in industries from profit planning, formulation of marketing plans as well as decision making on volume.
In decision making, it must be understood that cost volume profit is an important tool in short term planning. It should be ascertained that the relationships that exist between the costs of carrying out a business, the revenue generated from such business as well as the sales of a firm. This is important because in the simplest form it is the cost definition of profit.
The cost volume profit analysis is vital to marketer as it guides in the formulation of plans and control. The treatment of break even point allows the market to know the cost revenue behaviors of the firm, while planning allows management of an organization to minimize risk and uncertainty.
In the study of cost volume profit, the technique used is called break-even analysis, it is concerned with the study of revenue cost in relation to sales volume and particularly the level of activities that produces neither profit nor loss, where revenue equals to cost is the break even point.
The break even point can only be achieved when there is a decision involving price, volume and cost that can be split into two classifications.
The cost volume profit relationship is needed because it represents what profit decision can be made. The company decision on price and output attempts to produce the goods efficiently. If the planning process is effective and efficiently utilized, a profit may result.
- BACKGROUND TO THE STUDY
Concerned has been on cost even since the existence of money replaced by trade by barter.
It was the concentration of manufacturing facilities into factories which gave impetus into the development recognizable cost system.
The early developments were almost entirely related to manufacturing industries. The analysis is used in different prostates i.e. hospital, transport undertaking, local authority’s offices, banks as well as manufacturing companies.
It was realized that the information from financial accounting was insufficient for the numerous decision by the management. Due to this inadequacy, the development of cost accounting of which cost volume profit analysis was used as a means of decision taking.
History had it that there were seven factors which were responsible for this development among which are the increase in industrial activities, the production of war equipment in a contract based on cost plus policy which were known as time and line contract in position of price control by government and competition.
History also had it that this method was use before and during the First World War and to a lessee’s extent during the Second World War. It was used frequently in building trade even in U.S.A at that time and frequently used in modern times.
Those entire factors combine to create a necessity to determine and analyze cost supported by accurate facts and figures to ensure that cost did not go beyond marketing price or contract price.
During the year, fundamental principle was divided for costing before setting up of a cost accounting system. Therefore, some preliminary investigation has to be made to stand in form of principle to guide management in setting up the system.
These principles are:
- It must be designed to suit the business
- The cost of the system must be considered in relative to the scope of the business and the benefit to be obtained.
- The requirement of the management and laying out of the factory should be considered
- The method of storing raw materials and of enumerates labour whether by hours or pieces of work or by the combination of the two must also be considered.
- The personalities of the key personnel and the capacity of the office staff should also be considered.
- STATEMENT OF PROBLEM OF THE STUDY