The Application Of Cost Volume Profit Analysis In Most Profit Making Organizations In Decision Making Process
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The following subtopics are included in this chapter: the study’s background, its problem statement, its objectives, its research questions, its research hypothesis, its justification, and its definition of key terms.
1.1 Study background information
Every organisation involved in the production and sale of goods places a great deal of importance on the erratic nature of business and the constantly shifting conditions of their operations. In this context, management frequently needs to make decisions pertaining to how these changes will affect its costs and revenues. Because of this, a company’s success is typically attributed in large part to its management team’s capacity to manage likely future conditions. Plans for the short and long term must be carried out through sound management review. But there are numerous tools available for managing and directing business operations. The cost volume profit analysis, also known as the Break-Even theory, is one of the instruments that provides essential and necessary information for guiding a company’s profit path. This is an extension of marginal costing, and it primarily addresses the intersection of revenue and cost.
A straightforward and simple method for management to visualise the impact of changes in volume on profits is the break-even system. It foresees how current managerial decisions will affect future company survival and profits. They will be able to comprehend more information and data revealed by the Break-Even analysis with the help of the Break-Even theory. The cost-volume-profit data, as well as other data, are marshalled in this system to aid the manager in making day-to-day decisions. For management to gain perspective on the profit structure, it is best to view some of the data in chart form.
In addition, WALTER RAUTENSTRAUCH created a planning tool called the Break-Even chart at the start of the twenty-first century. This development significantly improved management’s ability to plan, forecast, and make decisions on profits. The idea illustrates the relationship between a company’s costs, volume, and profit. Moreover, show how cost, selling price, and volume are related.
Cost volume profit (CVP), often known as “Breakeven analysis,” is essentially an application of marginal costing methodologies. The analysis is interconnected at several levels of activity. We can calculate the breakeven point in units or FCFA when this is done. CVP analysis is mathematically derived from two analyses: total revenue, which is given as price multiplied by quantity (P x Q), and total cost, which is equal to fixed cost plus variable cost, i.e. TC = FC + VC.
Warren Reeve and Fess (1999) described CVP analysis as the systematic investigation of the interactions between selling price, sales volume, production, cost, and expenses not living out earnings.
The definition of CVP analysis given above makes it clear that this study is a complicated one for management because these relationships are frequently impacted by actions or causes that are totally or partially outside of management control. For instance, additional uncontrolled market dynamics like competition, seasonal fluctuations, and congestion among others frequently affect a product’s selling price in addition to cost alone.
Additionally, one of the key elements in a cost volume profit analysis is the concept of cost.
Defining costs as either fixed or variable costs is a more practical method to organise them. Any time a company produces something, its fixed costs are constant. Rental fees and senior management salaries are two examples of fixed costs, whereas variable costs fluctuate depending on the level of production. Only when a new unit is created can the company increase its expenditures. For instance, gasoline, energy, etc., thus the cost accountants’ CVP analysis is better and more suitably valued by the organization’s management. Every organization’s cost accountant contributes significantly to CVP analysis by giving management the essential data on the relative profitability indices of the various goods as well as the likely outcomes of changes in selling price and other variables.
1.2 Problem Description.
Although cost volume profit analysis is a crucial or fundamental tool for management in making decisions, management still has a lot of challenges implementing this method within the company. The reality that actual costs frequently exceed anticipated costs is the fundamental challenge encountered by profit-making enterprises. In businesses or organisations like CDC, managers often struggle to choose the best cost-cutting measures to use or put into practise in order to meet their organisations’ goals. Since it is impossible to determine pricing without knowledge of the production costs incurred, this results in inaccurate prices and profits, the necessity of cost in price decision is crucial to management. Making decisions that can be implemented to improve or correct this scenario is too dependent on issues like;
What volume of output must be produced for CDC to break even?
How is the cost behaviour in the CDC?
What impact does sales volume have on CDC’s break-even point?
What challenges did the CDC encounter when using the CVP analysis and what suggestions may be made to enhance its use?
1.3 Objectives of the Study
The objectives are subdivided into main and specific objectives.
1.3.1 Main Objectives
The main objectives of this research are to examine the application of cost volume profit analysis in most profit making organizations in decision making process.
1.3.2 Specific Objectives
That not withstanding, specifically the research is based on the following:
- To identify the level of output that can be produce in order for CDC to operate at break-even point.
- To examine the behavior of cost in CDC.
- To examine the effect of sales volume on the break-even point of CDC.
- To examine the problems faced by CDC in applying the CVP analysis and the possible recommendations that could be used to improve on CVP application.