Question

Chapter – Cost/Volume/Profit

1. Explain the meaning of fixed, variable, and semi-variable expenses.
2. In a cost/volume/profit analysis, what is the profit number if you are computing a breakeven point (I will allow a one word answer here).
3. What are the limiting assumptions with a cost/volume/profit analysis?

Answer 1

a. Based on the compulsion nature of spending, the expenses are classified as

1. Fixed Expenses;

2. Variable Expenses; and

3. Semi-variable Expenses.

1. Fixed Expenses: These expenses are fixed in nature as soon as the business starts. It means whether the business earns profit or loss these expenditures are must to meet. Expenses such as electricity, rental expenses, godown expenses, maintenance expenses (some categories) etc.

2. Variable Expenses: These expenses are tend to change on the basis of quantities, seasons, and sometimes no expenditure during the lockout times etc. Expenses such as raw material cost, labour cost, stores and spares etc.

3. Semi-variable Expenses: These expenses act as fixed and variable based on the circumstances. Expenses such as seasonal labour cost, repairs and maintenance , raw material or joint products etc.

b. Contribution

c.Following are the key assumptions of cost-volume-profit analysis:

1. There are only fixed and variable costs;
2. Behavior or costs will be linear within the relevant range;
3. Difficulty of steps in identifying fixed costs;
4. Selling price always constant for any volume;
5. There is no significant change in the size of inventory
6. Cost-volume-profit (CVP) analysis applies only to a short-term time horizon.