Importance of Profit- cost- volume analysis
As a manager, discuss how you would use or have used the concepts
1) Cost-Volume-Profit Analysis
2) Importance of Profit- cost- volume analysis
3) Variable Costing in Planning
4) Importance of Variable costing
1) Original post for two different topics total 600 words
2) 3 Responses to classmates = 450 words total
3) 3 articles/peer reviewed references for one question and 3 Articles/Peer Reviewed references for other question.
4) Citation required in the body.
5) APA format
Cost-Volume-Profit Analysis is observed as the employment of a model that helps in breaking down the complexity that exists between cost of production and operation, quality of goods produced, and the profits generated from the whole undertaking (Lulaj & Iseni, 2018). CVP takes into consideration the influence each aspect of operation or production unit has on the running of an organization. It stipulates the expenses that are to be incurred in a given operation by considering the fixed and variable costs that come with production of a good or a service or yet the sale of a product. This makes it an essential tool in the control of budgetary allocation in an organization as it provides the necessary information that gives direction on the combined activities that are likely to add value to an investor’s capital (Serfling, 2016). A major example may be stipulated in the production of a food product, which seems to gain demand on weekends. In such a case, the business producing the product will commit its resources elsewhere during the weekday to optimize on the scarce resources and avoid drowning in expenses example fixed costs such as rent and utilize its production unit to meet the accruing demand on weekends.
Thus, it is without a doubt to state that CVP Analysis is a major tool of planning used in managing risks, optimizing on the scarce resources which are all essential in enhancing customer satisfaction (Lulaj & Iseni, 2018). Essentially, CVP provides information that is crucial in the control and planning of production, among other operational activities in an organization.
Variable costing revolves around the assigning of the period and product costs in regards to a given kind of product. Researchers observe that it is an essential approach in internal reporting due to its ability to break the complexity that comes along with an organization’s operation and production (Creese, 2017). It addresses costs product costs related to manufacturing and specifically those that can be directly attributed to a product. In this case, it provides enough information that is crucial in controlling the production sector and makes plans through strategies such as budgetary allocation (Serfling, 2016). This is so in that it provides the relationship between the expected and actual costs and through this it becomes easier for the management to schedule their operations, which’s crucial in maximizing the possible profits.
Cost-Volume-Profit Analysis and Variable Costing in Decision Making
Cost-Volume-Profit Analysis is a model that is used to break down the relationship that exists between the three major factors in an operation that is quality of the product, the costs of production and the margin accrued upon sale of the good or service being accrued (Boyd & Pitre, 2019). CVP provides the necessary information that helps determine whether a certain production line ought to be expanded or reduced. This may be evidenced in a scenario in which a company is considering expanding its market operations as a result of an increase in demand for its beverage product. However, the cost of raw materials has increased, which is a major blow to the company in that if it increases its sale price, there is likelihood that it will lose its customers (Clifton et al. 2019). Nonetheless, the procurement manager has realized that the purchase of raw materials in bulk may lower the total cost associated with the input process. However, the marketing manager realizes that the profits are bound to shrink. The CVP analysis carried out shows a positive result in that increasing production will increase the profits in the long run as fixed costs have not changed (Clifton et al. 2019). Thus, the management may decide to go ahead and increase their production which will be crucial in increasing their profits due to an increase in the market for their beverages.
Variable Costing provides the behavior of costs under various conditions triggered by internal and external factors. It can be employed together with CVP analysis to provide the variable components that come with changes in production units, product mix, and entry into a new market, whether to buy or make a product and if there is need to engage in promotional activities (Otley, 2016). In case of the above example, through extensive scrutiny characterized by the employment of variable costing, it will be possible to identify and make decisions on whether to buy or make the beverage product. Moreover, it will be possible to decide on whether to set up a subsidiary company in the newly found market and, if need be, engage in promotional activities (Boyd & Pitre, 2019). Thus, the information provided is crucial in determining the direction an organization ought to take to foster customer satisfaction and optimize profits.
A) Profit- cost- volume analysis
Profit cost volume analysis or a break-even analysis identifies the break-even point where there is no profit or loss. Basically it identifies the variation in cost & volume that affects business operating income & net income. Four major factors that are constituted to know the break-even point are costs, sales volume, Selling price and profit. This analysis helps managers to make economic decisions like how many units should sell to break even, how many units a business should sell in order to gain certain profits, decisions to spend more on machinery or man power, deciding whether to spend more on advertising in order to improve overall product sales. Before doing this analysis manager should make few assumptions like unit selling-price should be stable/constant, overall costs should be able to divide into variable and fixed costs and constant, all the units produced should be sold, if the company deals with more than one product they should be sold in same-mix. There are two approaches that can be used to calculate break-even point is “contribution-margin” and “contribution-ratio” (Atkinson & Matsamura, 2012).
Contribution margin reflects the profit of the company before deducting fixed costs in other words it is unit selling price minus variable cost per unit. Contribution margin represents the percentage of sales that covers fixed costs. For example if a business sells a product which has exponential margin that means it is making enough revenue to cover fixed costs such as leasing amount, insurance amount. It will also identify if a product is not making enough margins to cover its variable costs such has wages for man power and equipment repair costs. Contribution margin clearly displays the overall percentage for each unit sold that covers variable-costs and profits. Hence a business always considers a minimum-price at which product unit can be sold which covers “Basic” and “Fixed” expenses. (Abdel & Luther, 2006).
B) Importance of Profit- cost- volume analysis
As a manager, profit cost volume is important to know how many units should be sold in order to gain certain amount of margin. Here as a manager I will use contribution margin to identify the breakeven point of sales. For example business has a 300,000 fixed costs and contribution margin of 20% should earn a total revenue of 1,500,000 to break even.
CVP = Fixed costs /contribution margin = (Sales-variable costs)
Therefore if a company sells 1500000 units it will break even and profit will be zero it covers only cost of the production. Based on this information I will calculate the number of units to be sold to make enough margins.
C) Variable costing
Variable cost reflects the overall company’s expense that varies with the number of units produced. Variable costs growth and fall will purely depends on the volume of the production. Variable costs include raw material, manpower, packaging costs which are involved in manufacturing a product. Whenever we look at income statement exponential rise in costs are not worries some because when sales rise more number of unites must be produced first that means variable costs should increase. In other words if a business wants to increase the revenues it should consider that expenses will also rise. At all times revenues should exponentially grow faster than expenses for example if a business volume growth is 10% and the number of goods sold is only 2% then overall costs are reduced per unit. Whenever a business identifies how to reduce its production costs to produce each item it will be easy to improve the profits (Hasan, 2015).
Variable costs are considered in project profits and to calculate cost profit (break-even) point. Also many cost elements have both variable and fixed costs associates for example company workforce salaries will not vary with the number of units produced but whenever production goes down then attrition rate may increase this clearly explains all the costs involved in production may vary at any point of time. The business which has more number of variable costs will reflect more consistency per each unit production cost and will have more chances to identify profits/margins. When a company markets its product it is important to divide costs between variable & fixed. This helps in forecasting the margins improved with varying changes in each unit sales. Variable costs are influenced by many elements such as discount rate, project duration, level of uncertainty and fixed costs (Agrawal & Mehra, 1998).
D) Importance of Variable costing
As a manager it is vital to calculate the variable costing because it helps to determine how many number of units to produced and it is important management tool to calculate the total costs.
Total Variable cost = Total Number of units produced x Variable cost per each unit
Lead glass (raw material) costs = $300,000
Manpower cost = $150,000
Equipment = $100,000
Insurance premiums = $50,000
Machinery = $100,000
Utilities (fixed overhead) = $40,000
Utilities (variable overhead) = $150,000
Number glass jars produced = 2,000,000
Variable costing formula= (Raw material + Labor cost + Utilities (variable overhead)) ÷ Number of glass jars produced
Variable cost formula= ($300,000 + $150,000 + $150,000) ÷ 2,000,000
Variable costing = $0.30 per glass jar
Per unit price = $350,000 / 1,000,000 = $0.35 per glass jar
A. Profit-Cost-Volume relationship
In Cost-volume-profit analysis is a strategy for cost bookkeeping that takes a gander at the effect that changing dimensions of costs and volume have on working the impact of three factors on one variable called the Profit. Cost-volume-profit analysis evaluates the changes in an organization’s costs, both fixed and variable costs, deals volume, and value, influence an organization’s profit. This is an integral asset in administrative fund and bookkeeping. It is a standout amongst the most broadly utilized devices in administrative bookkeeping to enable administrators to settle on better choices (Garrison, Noreen, & Brewer, 2018).
Here is a well ordered strategy we can utilize to do cost-volume-profit analysis:
Commitment Margin and Cost-Volume-Profit Analysis: To start with, investigate the commitment edge salary articulation. The commitment edge is the distinction between an organization’s deals and its variable costs. Computing the commitment edge salary proclamation demonstrates the partition of fixed and variable costs. Essentially expressed, it can fit into this basic condition:
Working Income = Sales – Total Variable Costs – Total Fixed Costs
So to the better of your understanding, this essential condition can be extended:
Working Income = (Price x Number of Units Sold) – (Variable Cost per Unit X Number of Units Sold) – Total Fixed Costs
In analyzing Cost-volume-profit, a ground-breaking capacity is to figure the break-even point in units for the organization. We can figure the break-even point in dollars by duplicating the business cost for item by the break in units.
Break-even point in units is the quantity of units the firm needs to create and offer so as to make a profit of zero. As it were, it is the quantity of units where all out income is equivalent to add up to costs (Garrison, Noreen, & Brewer, 2018).
On the off chance that working pay squares with zero, at that point the break-even point in units has been come to. On the off chance that the working pay is sure, the business firm makes a profit. On the off chance that the working pay is negative, the firm assumes a misfortune. In the event that you are attentive, we can see that the factors in this condition take after the factors you have effectively utilized in the cost-volume-profit condition. ##One of the focal points of Cost-volume-profit analysis is break even analysis. In particular, Cost-volume-profit analysis enables directors of organization to dissect what it will take in deals for their firm to equal the initial investment. There are numerous issues included; explicitly, what number of units do they need to pitch to earn back the original investment, the effect of a change in fixed costs on the break-even point, and the effect of an expansion in cost on firm profit. Cost-volume-profit analysis demonstrates how incomes, costs, and profits change as deals volume changes (Garrison, Noreen, & Brewer, 2018).
B. Profit-cost-volume important in planning:
The commitment margin is utilized in the assurance of break-even the original investment purpose of offers. By isolating the complete fixed costs by the commitment edge proportion, break-even the original investment purpose of offers as far as absolute dollars might be determined. For instance, an organization with $100,000 of fixed costs and a commitment margin of 40% must procure income of $250,000 to make back the initial investment. Profit might be added to the fixed costs to perform Cost-volume-profit analysis on an ideal result. For instance, if the past organization wanted a bookkeeping profit of $50,000, the all-out deals income is found by partitioning $150,000 the whole of fixed costs and wanted profit by the commitment edge of 40%. This model yields a required deals income of $375,000.
Cost-volume-profit analysis is just dependable if costs are fixed inside a predefined creation level. All units created are thought to be sold, and every fixed cost must be steady in a Cost-volume-profit analysis. Another supposition is all adjustments in costs happen on account of changes in movement level. Semi-variable costs must be part between cost orders utilizing the high-low technique, dissipate plot or measurable relapse (Lulaj & Iseni, 2018).
C. Variable Costing:
Variable costing is an idea utilized in administrative and accounting in which the fixed assembling overhead is avoided from the item cost of generation. The strategy is conversely with retention costing, in which the fixed assembling overhead is designated to items delivered. In accounting systems, variable costing isn’t permitted in money related revealing.
Variable Costing in Financial Reporting
In spite of the fact that accounting structures, disallow the utilization of variable costing in budgetary announcing, this costing technique is regularly utilized by administrators to:
Direct equal the initial investment examination to decide the quantity of units should have been sold to start procuring a benefit. Decide the commitment margin on an item, which comprehends the connection between cost, volume, and benefit. Encourage basic leadership by barring fixed assembling overhead costs, which can make issues because of how fixed expenses are dispensed to every item. Under variable costing, the accompanying expenses go into the item: Direct material, direct work, Variable assembling overhead. As per the accounting gauges for outside financial related detailing, the expense of stock must incorporate all costs used to set up the stock for its planned use. It pursues the basic rules in accounting the coordinating standard. Retention costing better maintains the coordinating guideline, which expects costs to be accounted for in a similar period as the income created by the costs (Lulaj & Iseni, 2018).
Variable costing ineffectively maintains the coordinating rule, as related costs are not perceived in a similar period as related income. In our model above, under variable costing, we would cost all fixed assembling overhead in the period happened. Notwithstanding, if the organization neglects to sell all the stock made in that year, there would be poor coordinating among incomes and costs on the salary explanation. Accordingly, factor costing isn’t allowed for outer detailing. It is generally utilized in administrative accounting and for interior basic leadership purposes (Lulaj & Iseni, 2018).
D. Variable Costing in managerial decisions:
At the point when managers use Cost-volume-profit analysis to settle on business choices, the accompanying suppositions are made:
All costs, including producing, managerial, and overhead costs, can be precisely distinguished as either fixed or variable.
· The selling cost per unit is steady.
· Changes in action are the main factors that influence costs.
· All units delivered are sold.
· Commitment margin
Cost-volume-profit analysis can help organizations decide their commitment margin, which is the sum staying from deals income after every single variable cost have been deducted. The sum that remaining parts is first used to take care of fixed costs, and the straggling leftovers thereafter are viewed as profit (Reinstein & Bayou, 1997).
On the off chance that an organization has $500,000 in deals income with variable costs totaling $300,000, at that point its commitment edge is $200,000. On the off chance that that organization sells 50,000 units in every year, at that point the business cost per unit is $10 and the complete variable cost per unit is $6, leaving a commitment edge of $4 per unit. The commitment edge can help organizations decide if they have to lessen their variable costs for a given item or increment the cost per unit to be increasingly profitable (Reinstein & Bayou, 1997).