Cost-Volume-Profit Analysis and Changing Costs: Reconciling Theory and Practice

Abstract

The traditional cost-volume-profit formula makes a number of assumptions that have been developed in the literature. In the presence of changing inventories and costs, the traditional formulation does not perform well. Much of the problem arises because of differences among financial reporting methods. This paper presents an approach to CVP analysis that models reported income when both inventories and production costs change during the year.

Key Words:

• Cost-volume-profit analysis
• inventory
• changing costs
• inventory policies