Cost volume profit (CVP) analysis and costing for the 21st century has evolved into a very complex and difficult paradigm. Even the most gifted accountants find that grasping the entire concept of accounting for a corporation can be very mind-boggling and difficult. Yet, understanding such a fundamental principle can allow corporations to grow in ways that other, less educated, corporations can never dream to achieve and simultaneously understand the ‘bottom-line’. In this paper we will discuss value costing in the 21st century, other relevant costing methods, and the relevancy of CVP in today’s workplace.
Before we criticize and analyze CVP it’s important to have a good understanding of what it does for a company and the accountant. Cost-volume-profit analysis is also known as contribution margin analysis, which is the percentage of sales dollars after variable costs have been subtracted (Toolkit, N.D.). When you utilize the CVP method you use variable costs and fixed costs to determine the profit of the company and products. Variable costs are those that vary with the amount of volume created and sold and other extraneous factors that can change on a day-to-day basis. Fixed costs are those that stay constant, regardless of how much product is created or sold. By utilizing variable and fixed costs an accountant can find the breakeven point for a company, where cost equals revenue. Yet as simple as the concept may seem, the challenges in defining these variables, as a hard set number, is what truly makes this tool a difficult one to master.
The question now raised is if CVP a good model for all companies especially those evolving in the 21 Century? Kirshan Gupta argues the modern company is changing its focus to a more custo...
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Krishan M Gupta, & A Gunasekaran. (2005). Costing in new enterprise environment: A challenge for managerial accounting researchers and practitioners. Managerial Auditing Journal, 20(4), 337-353. Retrieved March 12, 2011, from ABI/INFORM Global. (Document ID: 875490591).
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Table C projects the break even analysis in both units and dollars as a basis for further projections. As seen in Table C substantially larger sales are required to break even.
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx, 2009). The key to cost allocation under ABC is to identify the activities that are performed to provide a particular service and then aggregate the costs of the activities (Gapenski, 2012). This is a marked departure from the practice of sharing overheads costs equally or overheads becoming part of the overall profit-loss estimate instead of component product pricing (Nayab, 2011).
Even though a myriad of tools and techniques learnt in the Strategic Cost Management and Strategic Business Analysis courses are not fully exploited in this essay, it is generally recognised that those techniques are useful for a corporate to formulate strategy, do strategic planning, control costing and quality, as well as eventually elevate its values, regardless the nature and size of organizations.
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
[4] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 3, Cost Assignment, p. 54-59
Sulaiman, M., Nik Ahmad, N. N. & Alwi, N. M., 2005. Is standard costing obsolete? Empirical evidence from Malaysia. Managerial Auditing Journal, 20(2), pp. 109-124.
A fraction-of-a-cent cost change can represent a large dollar change in overall profitability, when selling millions of units of product a month. Managers must carefully watch per unit costs on a daily basis through the production process, while at the same time dealing with materials and output in huge quantities” (From Academic
Firms today are trying to introduce activity-based costing into their system, however, some firms are unsuccessful in the implementation, which later result in abandoning the ABC system. According to research, the reason of failure ABC implementation in People’s Bank of China is due to lack of a clear business purpose about the implementation, lack of education about ABC, poor ABC model design, lack of participants, individual and organizational resistance to change, and few outsourcers available. To solve these problems, top management support and cross-functional involvem...
Every company has some kind of Revenue and they all have costs that are associated with running the company. It is also true that if a company wants to increase their Revenue, their costs will increase too. It is every company’s goal to maximize revenue and either through Production or Services, and minimize cost. These things are easy to figure out, but actually identifying the production and figuring out how it will increase or decrease with change is very difficult.
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0. Retrieved from: https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=137
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
Many organizations do not achieve the profits they anticipate by using incorrect methods or models to determine the true costs of products and services. This failure to correctly assess the costs associated with business not only affects the profit margin, but the organizations competitive advantage as well. In order to asses whether the organization is failing to realize optimum resource allocation, the organization should look at the methodology first popularized by Michael Porter titled the Value Chain Analysis (VCA). "VCA seeks to define the entire chain through which goods are supplied to a customer" (Booth, 1997, 2). The VCA can be a powerful tool in increasing an organization's competitive advantage; by correctly pricing products and assessing the true costs of materials and labor, organizations can align the improvements in efficiency, quality, and profits with its strategic objectives.
The break-even point is located in the intersection between the total expense line and the revenue line. As it is shows, Cosmo-cosmetics operates at a sales Volume to the right of the break-even point (point A), this means that it would earn a profit because the revenue line lies above the expense line over this range ?Profit area?