Costing for the 21st Century - Essay Example

So that they may experience long-term profitability, careful planning and decision-making are necessary. The primary reason why people engage in business is to earn profit. Companies who have great knowledge in the mathematics of business are more likely to survive in the changing business environment (Foster, 2007). The management of businesses applies costing methods to help them make the right decisions. The use of cost, price, and volume analysis (CVP analysis) for the 21st century organizations is becoming an issue nowadays.

Because the focus of CVP is to deeply understand the correlation of cost, quantity sold, and price, it enables the firm to gain knowledge on important financial data (Hansen, Mowen, & Guan, 2009). The application of cost, price, and volume analysis (CVP analysis) is a way to precisely assess the impact of the major decisions that the firm's management has made ("Cost/Volume/Profit Analysis”). The Notion of Value Costing for the 21st Century Organizations There are many complexities in today's method of accounting.

Its essentiality to the entire business operation is the reason why the careful analysis of accounting is becoming crucial. The idea of value costing for the 21st century is still vital to any organization, although others seem not to agree with its implementation. This method is undeniably helpful to managers, especially in determining the impact of management decisions to the firm’s operations. The stiff competition in the various industries of the business sector compels the management of companies to seek for precise and extensive methods of estimating costs.

Managers who are given the task to gather relevant information for decision making sometimes find it hard to determine the appropriate method to use. Even though others consider CVP analysis as traditional, it is still absolutely applicable in today’s enterprise environment. Managers need to have an approximate calculation of the expected revenues, cost, and profits so that they can devise strategies and keep an eye on the firm's undertakings. Because of these, they conduct the CVP analysis.

It gives them a hint as to the extent of operating activities needed to not incur losses. When losses are avoided, there is a huge probability of obtaining the target profit. CVP analysis also helps managers figure out operational risks while in the process of selecting the appropriate cost structure (Eldenburg & Wolcott, 2004). The Application of Costing Methods Entrepreneurs are sometimes careless when launching a new product. They tend to hurry with its introduction to the market without even analyzing the price and the total costs of its production.

The outcome of this sudden decision is the inability to earn profit. One costing method used to avoid the inefficacy of management decisions is the break-even analysis or the cost-volume-price (CVP) analysis. It provides an assessment on the impact of the decisions made by the management. Break-even analysis is imperative to any organization because it determines the point in time when the business is able to make a profit (Small Business Development Organization, 2011). It is an effective tool that can be used to examine the total revenues, cost, and profit variable.

In this method the break-even point is identified that shows the point of equilibrium between sales and cost. In particular, the break-even point signifies a no profit and no loss situation (Siddiqui, 2005). Usually, manufacturing firms are the ones that use CVP analysis. Apparently, it is because these firms produce a product. In order to determine the value of the product, the total fixed and variable costs associated with its