Dealing with Fuzziness in Cost-Volume-Profit Analysis

Abstract

Abstract A major limitation of the traditional cost-volume-profit (CVP) analysis is its inability to account for uncertainty and risk. This deficiency has been resolved by the development of probabilistic and stochastic CVP models which require precise numerical assessment of uncertainties in sales demand. There remains, however, imprecision in the expert's assessment of the sales demand distribution. Sub-optimal decisions may result because such fuzziness is being ignored in the analysis. In this paper, the application of Fuzzy Set Theory to handle imprecision is presented, and it is suggested that the methodology is appropriate for accounting applications, especially those involving human judgement.