Management Accounting Project Report - Cvp Analysis for a Firm Under Expansion Phase
CVP Analysis | The CVP analysis helps in taking more than one decisions in a firm. How would you substantiate this statement for a unit under expansion phase | | Abstract
Companies commonly face major uncertainties in their product markets, particularly in the manufacturing industry where competition is often fierce and consumer tastes change rapidly. Managers need to estimate future revenues, costs, and profits to help them plan and monitor operations and to decide the mix and volumes of goods or services to produce and sell. They also use this information to evaluate profitability risk. Cost-volume-profit (CVP) analysis is the technique used to identify the levels of operating activity needed to avoid losses, achieve targeted profits, plan future operations, decide on expansion or contraction plans, monitor organizational performance and analyze operational risk as they choose an appropriate cost structure to help in the decision making process to sustain the firm.
Table of Contents
Introduction 4
Marginal Cost Equations and CVP Analysis 9
Cost Volume Profit (CVP) Relationship in Graphic Form 14
Applications of Cost Volume Profit (CVP) Concepts 17
CVP Analysis Illustrations - Unit in Expansion Mode 19
Illustration 1 19
Illustration 2 22
References 28
Introduction
To assist planning and decision making, management should know not only the budgeted profit, but also: * the output and sales level at which there would neither profit nor loss (break-even point) * the amount by which actual sales can fall below the budgeted sales level, without a loss being incurred (the margin of safety)
In marginal costing, marginal cost varies directly with the volume of production or output. On the other hand, fixed cost remains unaltered regardless of the volume of output within the scale of production already fixed by management. In case if cost behaviour is related to sales income, it shows cost-volume-profit
Companies commonly face major uncertainties in their product markets, particularly in the manufacturing industry where competition is often fierce and consumer tastes change rapidly. Managers need to estimate future revenues, costs, and profits to help them plan and monitor operations and to decide the mix and volumes of goods or services to produce and sell. They also use this information to evaluate profitability risk. Cost-volume-profit (CVP) analysis is the technique used to identify the levels of operating activity needed to avoid losses, achieve targeted profits, plan future operations, decide on expansion or contraction plans, monitor organizational performance and analyze operational risk as they choose an appropriate cost structure to help in the decision making process to sustain the firm.
Table of Contents
Introduction 4
Marginal Cost Equations and CVP Analysis 9
Cost Volume Profit (CVP) Relationship in Graphic Form 14
Applications of Cost Volume Profit (CVP) Concepts 17
CVP Analysis Illustrations - Unit in Expansion Mode 19
Illustration 1 19
Illustration 2 22
References 28
Introduction
To assist planning and decision making, management should know not only the budgeted profit, but also: * the output and sales level at which there would neither profit nor loss (break-even point) * the amount by which actual sales can fall below the budgeted sales level, without a loss being incurred (the margin of safety)
In marginal costing, marginal cost varies directly with the volume of production or output. On the other hand, fixed cost remains unaltered regardless of the volume of output within the scale of production already fixed by management. In case if cost behaviour is related to sales income, it shows cost-volume-profit
References: http://uwadmnweb.uwyo.edu/sbdc/pages_media/articles/articles/200/doc258.pdf http://sites.google.com/site/costaccountant1/chapter3%E2%80%93breakevenanalysis http://www.icai.org/resource_file/18855sm_finalnew_cp3.pdf Gordon Potter, Wayne J. Morse, James R. Davis, and Al L. Hartgraves. Managerial Accounting 5th ed.: Cambridge Business Publishers, 2004 http://www.cambridgepub.com/managerialaccounting/070-103_Ch%2003_Morse.pdf http://www.wiley.com/college/sc/eldenburg/ch03.pdf Davis, Joseph M. "Project Feasibility Using Breakeven Point Analysis." Appraisal Journal 65, no. 1 (1998): 41–45. Horngren, Charles T., George Foster, and Srikant M. Datar. Cost Accounting: A Managerial Emphasis. 9th ed. Upper Saddle River, NJ: Prentice Hall, 1997. http://www.icai.org/resource_file/15817rtp_finalnew_paper5.pdf Weygandt, Jerry J., Donald E. Kieso, and Paul D. Kimmel. Managerial Accounting: Tools for Business Decision Making. Hoboken, NJ: John Wiley & Sons Inc., 2005.