Determinants of Profit - From the View Point of Variable Costing!

The cost of production and volume of sales are the inter-dependent determinants of profit. The analysis of cost behavior in relation to the changing volume of sales and its impact on profit is very important to determine the break even level of a firm. The level at which total revenue equals total costs, is said to be the break even level where there is no-profit or no-loss. Sales beyond break-even volume bring in profits. Generally production is preceded by the process of demand forecasting, to decide on the volume of production, the produce of which will be absorbed by the market. Pricing and promotions come at a later stage. Costing is done to predict the costs of production and resultant profits at various levels of activity.
CVP analysis or Cost-Volume-Profit analysis helps a firm to study the interrelationship between these three factors and their effect on clean profit. The process also includes an analysis about the external factors that affect the volume of production, such as market demand, competitor threat and internal factors such as availability of infrastructure, capital and labor force, indeed.This CVP analysis is a boon to the managers, in that, they can find out the bottlenecks that hinder the productivity and find a way out, by adjusting either the levels of activity or controlling the cost.
Pricing is the most important factor that makes your product competitive. The costs of production can be classified into fixed costs, variable costs and semi variable costs. Fixed costs remain constant and tend to be unaffected by the changes in volume of output. Whereas variable costs vary directly with the volume of output and semi-variable as the name implies are partly fixed and partly variable. Cost accountants of the modern era fully support variable costing for the purpose of cost accounting, listing its merits as follows:

• Variable costing talks about contribution margin, which is the excess of sales over variable costs. If this is going to be high, sufficient enough to cover the fixed costs, then profit is assured for the firm. It is a key factor to determine the percentage of profit.
• Variable costing assigns only those costs to a product that varies directly with the changing levels of production, which is helpful in making a distinction of profit made from sales and those resulting from changes in production and inventory.
• Segregating the costs into fixed and variable is done for the purpose of providing information to reflect cost-volume-profit relationships and to facilitate management decision-making and control.