A Brief Report On Application Of CVP Analysis In An Organization

Question

Task: Provide a brief note on dissimilarities in the process of managerial accounting and financial reporting information and also describe the pros and probable cons linked by the analysis of Cost Volume Profit/ CVP. Discuss the way in which the technique explained earlier might help your colleague or friend in the efficient management and supervision of concerned resources in the business. Provide some recommendations for your colleague you should have provided.

Answer

Introduction: This cvp analysis assessment reviews variations in the general profit, entire revenue, and total cost along with the variation in the degree of production, selling price or maximum retail price per unit or fixed cost of manufactured goods or provided service. The process of Cost Volume Profit analysis will ease out the process of formulating decisions and devising strategies to conduct the daily business operations in an effective way along with aiding in making price assessments.

Features Of CVP
Contribution Margin: The proper assessment of the profit equation which depicts the equality of profit to the difference in the aggregate revenue and costs is the basic principle of CVP analysis.

The Profit could be depicted using the below calculation: -

Profit = SP (x) – VC (x) – TFC
X = The number of sold units.
VC = Variable cost for a unit.
SP = Selling Price decided for a unit sold
TFC = Total Fixed Cost
Profit = (SP – VC) (x) – TFC
Profit = Contribution margin per unit(x) – TFC

The influence every vented unit makes on covering the digits of an increase in profits and fixed costs are termed as contribution margin per unit. The unit for the required value of goods required to be manufactured and traded to accomplish the desired stage of income could be established by the concept of contribution margin.

If considered the situation of clients, the anticipated amount of profit is not recovered by the clients, although if the method of CVP is implied, the amount of profit after the deduction of the taxes could be estimated and hence the client could achieve the target of profit by commencing the level of targeted production by the means of contribution margin.

Break-Even Point: The instance at which an organization commences any gain or harm in its trade is called Break-Even Point. The value of the break-even point could be computed by the aid of contribution margin per unit value. Below is given the depiction of break-even point: -

The concept of Break-Even Point is very significant for a client, since the operation of business below this point is not helping him in accruing any profit or loss. This point is an indicator for a trader on whether he should continue or stop his activity of goods or service supply.

Sensitivity Analysis: To ascertain and solve various instabilities in the business, various organizations use Sensitivity Analysis. By using the System Analysis, how the variation in operating income influences the variations in any of the factors mentioned in the profit equation just similar to how the fixed variable cost affects the selling price of the units sold could be ascertained. By using this analysis, the managers of the company could make decisions by keeping in mind the probable risks in the market with broad perspectives.

The Margin of Safety is one of the major facets of Sensitivity Analysis. The volume of excess revenue in breakeven income is termed as the Margin of Safety. The management team of a company could seek the aid of Sensitivity Analysis to identify the point at which the revenue and expenses with a higher level of Margin of Safety have the probability to decrease approaching the break-even point.

The Cost structure of a company is an additional facet of the Sensitivity Analysis. As per the cvp analysis, risks present in the market and the organization’s appetite various cost structures should be considered. Operating leverage could be used to determine the risk-return related to various cost structures. When the fixed costs are observed to be at a higher level than the level of variable costs or vice versa the degree of the operating level is said to be high. The variation in the level of fixed costs indicates the course to a variation in the operating income, the degree of contribution margin and the leverages for operating measures. A minor variation in the quantity points to a dynamic change in the income needed for the operation of a company that possesses a higher level of operating leverage.

Multiproduct Analysis: The method of CVP analysis could be used if the organization has the possession of multiple products. In the case of similar products, the method of weighted average contribution margin could be implemented.

The ratio of CVP analysis could be utilized by the company if the organization supplies very distinct products like in the instance of a retail store. In this case, it is very significant because the amount of total sales is more crucial than that of the per-unit sales. Thus, the ratio of contribution margin is very crucial in attaining the mark of intended income from the operation.

Pros of CVP Analysis: While decision making, the CVP tool comes out to be a very important tool for the management team. By implementing the CVP tool, the organization could make a target on the intended profit and synchronize its internal process to attain this target. The management could increase the profit of the organization by augmenting its expenditure on the process of production by referring to the break-even point analysis. The break-even point analysis also helps the management and the top authority in the process of decision making, as the decisions devised could be segregated into many prospects.

A valid and thorough picture of the business processes like the cost and production details could be obtained by using a CVP analysis.

Limitations of CVP Analysis: The conventions and the assumptions made i.e. the cost of all the products could be segregated into a fixed or an elementary cost is one of the elementary limitations, is one of the elementary drawbacks of CVP Analysis. This is considered a drawback because various products may have complex costs and they tend to be stabilized even if there is a large dynamic change in the processes.

Financial Reporting Vs. Managerial Accounting Information: By the process of Financial reporting, a stakeholder could get access to the data regarding financial statements and the statistics and entries provided in the balance sheets, cash flow statement, and the income statement. In an organization it is obligatory to maintain financial accounts for the stabilized conduct of the business.

By the means of managerial accounting the data regarding the cost structure of a company which eventually turns up to be substantial information for the management of a company that is imperative for the efficient management of the business by devising various strategies and policies for the company. The maintenance of the managerial account is not considered compulsory by the management. In the process of Managerial accounting various factors like capital budgeting, CVP analysis, Activity-based costing, etc. are considered to be very important tools.

Recommendation
From the above observations in this report on CVP analysis, it could be suggested to the management of a company that it should implement the CVP analysis since it aids the elimination of depletion in the research through proper planning. The estimation of break-even point aids the management in determining the to extent to which the products should be manufactured and supplied whereas the implementation of the sensitivity analysis assists the management in predicting and analyzing various changes that are implacable on various variables like selling price, fixed costs, and other factors to attain the desired profit. The aggregate profit after the deduction of the taxes could be calculated by the method of contribution margin approach which ultimately provides a crystal-clear picture of the business processes and activities. This overview of the business processes will aid in making a very different course for the company to attain its target. CVP analysis assignments are being prepared by our management assignment help experts from top universities which let us to provide you a reliable online assignment help service.

References
Kaplan, R.S. & Cooper, R. (1997) Cost and effect: using integrated cost systems to drive profitability and performance. Boston: Harvard Business School Press.

Code Connect, (2006), Cost – Volume – Profit Analysis, Journal of Corporate Accounting and Finance, pp.

Code Connect, (2006), Cost – Volume – Profit Analysis, Journal of Corporate Accounting and Finance, pp.

Chung, K.H., (2006), Cost-Volume-Profit Analysis under Uncertainty When the Firm Has Production Flexibility, Journal of Business Finance and Accounting, Vol. 20(4), Wiley Online Library.