Cost volume profit analysis is used primarily by management

A. Using the Internet, review at least 3 articles on Profit-Cost-Volume relationship. Summary (300 -350 words or more) the articles in your own words.

B. As a manager, why is Profit-cost-volume important in planning? Support your response with numerical example(s)

C. Using the Internet, review at least 3 articles on Variable Costing. Summary (300 -350 words or more) the articles in your own words.

D. As a manager, discuss how you would use Variable Costing in managerial decisions Support your response with numerical example(s)

1) Respond to 1st article with 150 words
A)The cost-volume-profit analysis can be defined as a method or way that is where the cost accounting may be looking with them for an impact over varying at different levels of their costs or the volume of not having their operational profits. They would also be called as an analysis, that is commonly used as break-even analysis, that is used for looking for determining them through a break even points over different kind of sales of volumes and through costs with their structures, that would be used with their managers to making some kind of short-term of their economic decisions.

With having cost-volume-profit analysis makes the several assuming, includes their sealing price, fixed costs, or variable cost per unit should be constant. And by running over the analysis involving several different equations with their price, cost and all other variables, that are plotted over the graph. By contributing the margin use over the determination of break-even point of sales. And dividing total fixed costs would be contributing their margin ratio, break-even point be with the sales in terms of total dollars should be calculated.

In other words, CVP can be more as management account tools that is very expressive with the relationship between total sales, total cost and profit. The CVP relationship could be with the one that is very important tool of cost or the management accounts. It is having the powerful technique with furnishing complete picture of what is the profit structure and it would be helping them through planning for their profits. They would be answering through what kind of questions been with what telling being with the volume of requirement to produce. The concepts over with the relevant to have any decision-making areas, for them to be particular with any short run.

As break-even analysis is any kind of subset that a cost-volume-profit (CVP) analysis, that may be with them through using a management that is helping their understanding with the relationships between cost, sales volume and profit. The tools and the techniques be major focuses over with how to have selling, sales volume, variable, fixed or mixing of the products that would be selling through affects over the profits.

B) With having an understanding of all the basic tenets of CVP analysis helping them to be analyzed by an organization or the manager as these factors would be in the business and make them it better for the business decisions. For instance, with the organization having $100,000 of fixed costs and contribution margin of about 40% earning revenue of $250,000 need to break. That would be sales revenue of about $375,000.

By CVP analysis it would be able to manage their product that is contributing them through a margin. They would be having contribution over a margin through any kind of difference among them through all the total sales or the variable costs. By having the business that is having them with the profitable, for contribution margin they may exceed the total fixed costs. They would be contributing with the margin that will be calculating through per unit and with the contribution margin through simple remainder that would be unit variable cost be subtracted from that unit sales price. This contribution margin ratio with the determined by dividing contribution margin by total sales.

C) As variable costing is called as a concept using the managerial or the cost accounting that would be fixing the manufacturing that is overhead would be excluded through product-cost of production. The ways that is in contrast with absorptions costing, that would be with them through fixed manufacture with them through an overhead with allocation with their products produced. By having variable costing could be very poorly upholding over the matching principle, as they are with the relations through an expense with not recognitions that would be at same period as they are related with their revenue. The variable costing could be making them through many more difficult ways of determining the ideal price would be good and services. As for them through not being directly with the considered as the costs of their organization having the cover over the profitable. By looking at costs only with the direct associations with them production, variable costing that makes them easy for the organization to compare their potential or the profitability of manufacturing one product over another.

By having the accounting frameworks like GAAP or IFRA that would be prohibiting them through using variable costs that is with the financial reports, through costing ways or method that is very commonly used by the managers are conducting that would be break even analysis to be determined over the number for their units requirement with selling through earning of their profit. With the determination over the contribution margin over the product, that would be helping them through an understand of their relationship among cost, volume, and profit. By facilitating them through a decision-making they are with the excluding over the fixing of manufacture over heading costs, that could be created over the problems or issues that would be due to how they would be fixing the costs are allocated through every and each product.

D)Here while 2018, the organization manufacturing is 1,000,000 phone cases and reported total manufacturing costs of $598,000 (around $0.60 per phone case). As the manufacturer receiving a special order of 1,000,000 phone cases at price of $400,000. Sample capacity, where the manager at the cost of $598,000 to manufacture with an initial of 1,000,000 phone cases as that is outlined over the company’s income statement. Therefore, we will use the variable costing through determining them whether with the accepting special order by the following:

Variable costing:

Direct material of $150,000

Direct labor of $75,000

Variable manufacturing overhead of $80,000

Cost = $0.305 x 1,000,000 = $305,000.

Therefore, there is a contribution margin of $400,000 – $305,000 = $95,000.

Based on our variable costing method, the special order should be accepted. The special order will add $95,000 of profits to the company.

Reference

corporatefinanceinstiture.com. (2018). Variable costing. Retrieved from,https://corporatefinanceinstitute.com/resources/knowledge/accounting/variable-costing/

Bösch, P. M., Becker, F., Becker, H., & Axhausen, K. W. (2018). Cost-based analysis of autonomous mobility services. Transport Policy, 64, 76-91.

Ederhof, M., Nagar, V., & Rajan, M. V. (2018). How Economically Significant Are Unused Capacity Costs? A Large-Scale Empirical Analysis. Management Science, Forthcoming.

Rohit Agarwal (2020), Advantages and Limitations of Variable Costing, retrieved from http://www.yourarticlelibrary.com/accounting/costing/advantages-and-limitations-of-variable-costing/52647

Sherrie Scott (2020), Arguments for Variable Costing in Managerial Decision Making, retrieved from https://smallbusiness.chron.com/arguments-variable-costing-managerial-decision-making-35925.html

Fuksa, D., Trzaskuś-Żak, B., Gałaś, Z., & Utrata, A. (2017). An evaluation of practical applicability of multi-assortment production break-even analysis based on mining companies. Archives of Mining Sciences, 62(1), 33-44. doi:http://dx.doi.org

2) Respond to 2nd article with 150 words
Profit-Cost-Volume Relationship

In his work, Freedman, (2019) did a comprehensive the special tool used to open an understanding on the close and rigorous relationship between cost, volume of sales and profit. The trio’s relationship positions the enterprise in pole position to calculate and analyse the break-even point. The break-even is the sales limit where no losses incurred as well zero profit (Freedman, 2019). Other key results of the relation include; Safety Margin, Contribution Margin and Target Profit. Without the above mentioned forces, the business will be unable to technically get the contribution of every dollar to the profit frameworks. Generally, the article is a milestone for many who wish to realize the dream of an exclusively profitable business venture.

R. Abdullahi, A. Sulaimon, I. Mukhtar and M. Hardy, (2017) are the collaborative authors of an analysis text of CVP as a management tool for small enterprises. With the explosive emergence and dependence on small-scale industries, experts have deviced a tool to monitor, manage financial and ultimate profitation goals. Understanding the relationship arms the business owners with technical skills for effective decision. “Crisis point”, the point of covering costs without profitability, is a key point for small business to strategize on marketing, product lines and optimization of the available resources (Abdullahi, Sulaimon, Mukhtar and Hardy, 2017). According to the article, there are some assumptions for CVP analysis. They are prices of production inputs, fixed and variable costs and linear revenue behaviors.

The article by Dabor, Otalor and Erah, (2013) is the final text under analysis in this section. The authors narrowed down on the concepts, model and chart/graph representation. The accountants model is regarded as the tool behind the relationship between output and fluctuations in total sales income and net profit. With the model, managers have access to pragmatic foundation of decision making. Under the model, the concept is a reliable and veritable tool for cost, revenue and profit planning. Once assumptions are made, it is equally advisable to conduct sensitivity analysis to understand the input of the assumptions to the final decision. The article is very useful in revealing the essence of assumptions in accounting models.

2. The Importance of Cost-Volume-Profit in Planning

Failing to plan is planning to fail. Companies with a clear road map to success has tasted the sense of this phrase. CVP works aptly to give companies the essential profitability insights of their products and services. Analysis of CVP helps companies in determining the crucial contribution margin. For the margin, accountants play a critical role in careful calculations of sales revenue balances after the deduction of all variable expenses (Abdullahi, Sulaimon, Mukhtar and Hardy, 2017). The recorded balance partially pays for the fixed costs with the remnants regarded as net profit. For example, is a company has $600,000 in sales revenue, $200,000 in variable costs, then the contributing margin is $400,000 (Backman, 2016).

Most companies and accounting expertise use CVP to arrive at informed decisions about products or services they deal. The tool plays a key role in managerial accounting as well as financing accounting. Through the reports of the latter, managers and those tasked with running businesses make cost-effective and smart moves (Backman, 2016). Financial accountants uses the report to sell the economic image of a company to external stakeholders such as lenders and other financial institutions. In short, the organization can access all financial information at one point.

According to experts, a service’s and product’s profitability is analysed using CVP as the basic model. Profit changes are estimated with all factors of production and revenue assumption put together. The tool as defines the capacity of all plants, equipment, managerial and non managerial skills. If the capacity is not effectively foreseeable, the management is usually compelled by the resources and skills for a balanced capacity of factors of production. The move does not mean that production grounds to halt. Systems continue to run since the CVP tool is never an option for total shut down of production lines and processed. to act on emergence planning (Backman, 2016). The mini-planning ensures that all relevant A huge advantage of handling all sections of financial analysis of CVP is its unrivaled simplicity.

3. Summary Text of Three Articles on Variable Costing

The first article to be summarized is the work of Dyhdalewicz, (2015). The article is a true voice of the relationship between profitability and inclusive specifics of an organization's activity. The operational cycle is primarily centered on commodity circulation. From the operational cycle, the phenomenon of operational profit is brought to life. Variable costing is hence regarded as the costs of operational activity with regards to the changes of an enterprise activity. The article also explains the managerial decisions attached to variable costing. They include: trade units’ choice, basic pricing framework, the degree of internationalization of the enterprise activity and the general development of the activity.

(Hassan, 2015) outlines the applications of variable costing in a manufacturing company. Under variable costing, product costs comprise of the costs incurred in manufacturing directly connected to the product/good. According to the author, variable costing is manufacturing situations is needed for internal reporting. Accountants are key players in actualizing the process of variable costing. The aspects of variable costing are never complete without mentioning of contribution margin. The margin determines the final position of any organization in terms of financial performance (Hassan, 2015). The author shows a strong understanding of the term on analysis and the implications more so on the contribution margin.

The last article is work of Cevdet Kayal and Aydm Gersil. The duo’s study opens a stringent comparative analysis between full costing, normal costing and variable costing. Variable costing refers to the method of cost accumulation that entails variable costs of production. The cost of goods bought and margins of gross sales are lower compared to the variable costs (Kayal and Gersil, 2016). When the situation reads otherwise, the management and accounting sections should step in to salvage a potential crisis. The article illuminates all production mechanisms related to the variable costs (Kayal and Gersil, 2016). Production capacity, according to the author, is a fundamental component of defining, determining and harmonizing variable costs for the enterprise.

4. The Role of Variable Costing in Managerial Decisions

Financial responsibility forms a top role for any management within a profit-oriented enterprise. The challenge is of equal essence for both small, medium and large scale business organizations. We are living at competitive times in almost every aspect of our lives. To exhibit competitive cutting edge, organizations are tasked with encouragement and support of tools such as Variable Costing. Through managerial accounting, variable accounting helps the management to analyse data and financial figures so as to make logically sound economic decisions (Hassan, 2015). Without, the tool of Variable Costing, internal reports would be difficult to achieve. The confusion of fixed overheads in the financial equation is eliminated and the equation is smooth.

Another role of Variable Costing is product offerings. Managers utilize the tool to establish the type of products to offer and supply and the ones to discontinue. Decisions are no longer based on negligible profits and Variable Costing is taking over. The overall cost of keeping the product in the market is determined by the tool. For example, if an enterprise produces four items and makes the decision to discontinue two of them, higher overhead costs sets in for the remaining products (Hassan, 2015). Upon consideration, the costing helps the manager logically understand the absorption benefits of the fixed costs with a prime aim of profitability.

Accuracy is a key aspect if managements are to hit the journey to sustainable profits in their organizations. There some factors that push them to implement accuracy analysis tools including sales fluctuations, market segmentation and change of regulations on certain products. The potential irregular sales pattern are best analysed using Variable Costing. The accuracy to determine the production costs is notably improved, hence, influencing informed decisions from the management (Scott, 2019). For comparable sales patterns, the management can open the future production costs and estimates using Variable Costing.

References

Abdullahi, Sulaimon, Mukhtar and Hardy. (2017). Cost-Volume-Profit Analysis as a Management Tool for Decision Making In Small Business Enterprise within Bayero University, Kano. Journal of Business and Management (IOSR-JBM) , 40-45.

Backman, M. (2016, November 25). What Is CVP, and How Is It Important to Managerial Accounting? Retrieved from The Motley Fool: https://www.fool.com/knowledge-center/what-is-cvp-and-how-is-it-important-to-managerial.aspx

Dabor, Otalor and Erah. (2013). The Cost-Volume-Profit Model: A Discuss. Journal of Accounting Frontiers, 68-80.

Dyhdalewicz, A. (2015). The Implementation of Variable Costing inthe Management of Profitability of Sales in Trade Companies. Journal of Financial Internet Quarterly , 116-127.

Freedman, J. (2019, January 16). Cost-Volume-Profit Relationship & Break Even Analysis. Retrieved from Smallbusiness.chron.com: https://smallbusiness.chron.com/costvolumeprofit-relationship-break-even-analysis-67266.html

Hassan, M. (2015). Variable Costing and its Applications in Manufacturing Company. International Scholar Journal of Accounting and Finance, 5(1), 1-12.

Kayal and Gersil. (2016). A Comparative Analysis of Normal Costing Method with Full Costing and Variable Costing in Internal Reporting. International Journal of Management (IJM), 79-92.

Scott, S. (2019, September). Arguments for Variable Costing in Managerial Decision Making. Retrieved from smallbusiness.chron.com: https://smallbusiness.chron.com/arguments-variable-costing-managerial-decision-making-35925.html

3) Respond to 3rd article with 150 words
Part A: Relationship of Profit-cost-volume

In the current business environment, every management should calculate business income, expenses, and profits of the business. Lulaj & Iseni stated that in order to analyze and make the proper decision for the firm uses Cost-Volume-Profit (CVP) analysis. By the analysis, the firm will able to recognize how to increase business profits, reduce the issues, and plan for future operations. CVP analysis will contribute to business growth and increase profits. So, it is one of the techniques which helps to plan for increasing profits. The CVP analysis also shows the relationship between target profits, cost, production volume, and sales price (Lulaj & Iseni, 2018). Moreover, it is most helpful to make an appropriate decision. According to Punniyamoorthy, CVP explores the relationship between the various elements in the planning such as variable cost, value, and sales. By analyzing the firm will able to margin pricing and increase benefits for the organization. CVP directs the relationship between sales and profits. The author stated that it is one of the powerful tools which provide the structure of profits (Punniyamoorthy, 2017). The company will gain many benefits by effectively analyzing and enhances its future. Nowadays, most of the organizations are using CVP powerful tool to increase business profits. Mainly to achieve the level of profits and business goals need to use the tool. It also helps to implement strategies for cost estimation and planning of sales. CVP analysis applies to profit-making firms. CVP is a management accounting tool that expresses the complete relationship between profits, sales, and volume. The author has conducted an analysis, according to the results it is identified that in order to calculate profits must use the tool. It helps the firm to achieve profits and also to reduce future risks in the firm (Kavitha, 2018). Therefore, it is most powerful which is beneficial for all the organizations to analyze profits that can gain by the firm.

Part B: As a manager, profit-cost-volume is most important for planning and also to make a proper decision to increase profits for the business. CVP is mainly used for defining the changes in volume and cost that affect business income. It also helps management to increase sales by avoiding loss. For instance, the manufacturing company is developing products for one of the product fixed costs is 235000, and the profit volume ratio is 88.55%. By analysis, it is identified that sales of the company are 265386.78. For the firm, CVP will able to achieve its goals and also increases its benefits.

Part C: Variable costing

In managerial accounting, variable costing is one of the methodologies which will assign a variable cost for the inventory. It provides an incremental cost that is related to a particular product developed by the organization. According to Aleem, Khan, & Hamad, it is clear that there are different types of costing methods which include variable costing and absorption costing. Mainly in variable costing, only product cost is considered that varies with activity. In this method, it only consists of the material cost of the product, labor cost, and above cost. But it will not consider a fixed cost. Variable costing provides many benefits for firms which include profit will not affect, it has the capability to predict profits for the developed product, and by using the variable costing method the profits of the business are close to net cash flows (Aleem, Khan, & Hamad, 2016). The variable costing method should use for making an effective decision. Hasan asserted that in the variable costing method, it only consists of the cost that is correlated with the current developed product. The method is only used internal analysis because that provide proper insights. But by using the variable costing method will meet the organization requirement and also focuses on the product cost. In some of the cases, variable costing will provide guidance for the pricing product cost and increase the profits for business (Hasan, 2015). Furthermore, it is the most important technique for the manufacturing sector to reduce issues and increase benefits. Nawaz stated that variable costing is also known as marginal costing. Some of the companies which are using absorption costing are changed to the variable costing. It benefits in many ways like resolves issues of cash flows and provides information for the CVP analysis (Nawaz, 2013). Finally, from analysis understood that it is an essential tool for planning in the organization.

Part D: As an accounting manager, variable costing is used in the business in order to determine the cost per unit. Mainly for the organization, it acts as a decision-making tool for managing internal reporting. If a variable costing method is used in the organization will able to provide accuracy, increase profits, and controls cost. Instead of ignoring products based on insignificant profits. It also enables the manager to make decisions by eliminating manufacturing directly above cost. For the organization, variable costing will only use for internal reporting. Therefore, it is used to maintain profitability and reduces variance by controlling cost.

References
Aleem, M., Khan, A. H., & Hamad, W. (2016). A comparative study of the different costing techniques and their application in the pharmaceutical companies. Audit Financiar, Vol. 14, No.11., 1253-1263.

Hasan, S. (2015). Variable Costing and Its Applications in Manufacturing Company. InternationalScholar Journal ofccounting and Finance, Vol.1, No.1., 01-10.

Kavitha, R. (2018). Cost Volume Profitability Analysis - An Empirical Study With Reference To Salem Steel Authority of India Limited (SAIL),Tamilnadu. International Journal of Business and Management Invention (IJBMI), Vol.7, No.5., 46-51.

Lulaj, E., & Iseni, E. (2018). Role of Analysis CVP (Cost-Volume-Profit) as Important Indicator for Planning and Making Decisions in the Business Environment. European Journal of Economics and Business Studies, Vol. 4, No. 2., 99-114.

Nawaz, M. (2013). An Insight Into the Two Costing Technique: Absorption Costing and Marginal Costing. Broad Research in Accounting, Negotiation, and Distribution, Vol.4, No.1., 48-61.

Punniyamoorthy, R. (2017). Examining Cost Volume Profit and Decision Tree Analysis of a Selected Company. World Wide Journal of Multidisciplinary Research and Development, Vol.3, No.9., 224-233.