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4. Explain the additional limiting assumption of using CVP analysis under activity–based costing.

4. Explain the additional limiting assumption of using CVP analysis under activity–based costing.

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Expert Solution

Cost volume profit analysis is analysis of relationship between cost and volume with profits of the firm. It works with certain inherent assumptions only and hence it has below limitations under activity based costing

· CVP assumes all costs under activities are directly linear with the number of activities incurred. However they can certain costs which are non linear or curvilinear in nature

· The classification of cost under activities is assumed to be variable for movement in activities. However in practical all costs are not variable in nature for each activity

· CVP assumes activities as the main driver for the cost but there may be many drivers of cost other than activities

· CVP assumes one activity will drive cost for a particular cost pool whereas in reality the cost may be affected by multiple cost drivers.

· The classification of cost under ABC as product level or facility sustaining level may differ in CVP approach

ekkarill92 answered 2 years ago
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