Cost-Volume-Profit Analysis - Assignment Example

Managers in this competitive world is entrusted with a lot of responsibility and need to devise a strategy through which they are able to forecast the future sale, profit, revenue and cost model so that based on it future decisions can be made. Cost Volume Profit analysis is a tool in that direction which helps the managers to evaluate the level of activity they need to work upon so that the business doesn’t incur any loss which helps to achieve the targeted profits and helps to enhance the operational efficiency of the business. Cost Volume Profit analysis thereby ensures better decision making and is widely used to support decision making within the organization. Cost Volume Profit analysis thereby looks towards different tools and directions to be able to correctly gauge the future requirements and based on it helps to take useful decisions. This are as Knowing: Knowledge is the most important aspect in Cost Volume Profit analysis as it helps the user to understand the market requirements. For example, Compaq was able to understand the market requirements of computers and based on it design the computers after gaining useful insights with respect to the process, quality and competition which ensured smooth production. Identifying: This is another important aspect in Cost Volume Profit analysis as organizations need to identify the uncertainties that the market will present and look towards devising strategies that will help to deal with those uncertainties in a better way. This will facilitate the overall process and ensure maximum efficiency in the use of the resources. Exploring: Cost Volume Profit analysis involves looking for other alternatives and taking new directions so that the manner or the process used by the organization provides the operational efficiency that the business is aiming at. Further, this helps the business to identify new ways and helps to magnify the overall manner in which the Cost Volume Profit analysis results are provided. Prioritizing: Cost Volume Profit analysis involves prioritizing the different decision based on the urgency and importance so that the organization is able to gain operational efficiency. This helps the business to ensure that the resources are put in the best use and the organizations as a result are able to reduce wastages and ensure maximum opportunity of growth for the business. Cost Volume Profit analysis is thus defined as a process which looks to ascertain the profit that the business will make with changes in the volume, cost and prices. Since, this analysis looks into different aspect of the business performance it is widely used by managers as it helps them to estimate the future requirements in response to the operational activity and the areas that will be the most profitable for the business over a longer period of time. Cost Volume Profit analysis looks towards identifying profits both at the total level and at the individual level which thereby guides the manager is decision making and helps them to estimate the future requirements better. The profit using the Cost Volume Profit analysis is as Profit = Total Revenue – Total Cost This is further segregated into Profit = Total Revenue – Total Variable Cost – Total Fixed Cost This helps to find the total profit attributable to a product at a particular level of activity which when divided by the number of units helps to arrive at the profit per units. This thereby helps the manager in estimating the level of activity at which the business should perform so that they are able to keep themselves ahead of their competitors. Further, Cost Volume Profit analysis is also useful for multiple products which helps the managers and the organization understand the products which are providing profits and which are not. This thereby helps the manager to bring about the changes in the level of activity so that the business is able to achieve maximum efficiency and ensure maximum gain for its stakeholders. Cost Volume Profit analysis helps the managers and the organization in different ways and can also be used as a tool for motivating the employees. This analysis helps to monitor and evaluate the performances which can thereby be used to gauge the performance and motivate the employees so that the organization is able to garner better profits. For example, the managers in an organization can use the Cost Volume Profit analysis to identify whether the performance of the outlet is satisfactory or not. This will also help to find out whether the employees requirements is more than they should actually have. This will thereby provide the model based on which the organization can look towards imparting different revenue and cost models which will help to improve the operational efficiency and motivate the workforce to accomplish bigger things and ensure higher contribution to the organization. Despite the manner in which Cost Volume Profit analysis tools helps the managers it has certain assumptions which make the actual results to be different. There could be situations where the suppliers offers discounts or there is a short supply or change in the learning curve or change in the efficiency level of the production unit or change in the discount structure provided to customers might result a change in the operational activity and will thereby result in a different result for the organization as shown below Thus, Cost Volume Profit analysis technique provides various important directions for decision making but largely depends on the manner the information has been explored and used to provide complete justification to the various business decisions that have been made. This requires that the manager has an efficiency team which helps to provide valuable and useful information to the management so that based on it the mangers are able to understand the uncertainties and develop a framework which helps the management to ensure the best use of the resources. Cost Volume Profit analysis thereby helps managers and provides a tool through which they are able to ensure the following To estimate the profit that the business will be able to earn at a particular level of operational activity by having a relationship established between the cost and profit on one hand and the amount of goods or services being produced on the other (CVPA, 2012). This thereby helps to establish the required relationship which guides the manager in deciding the level of operational efficiency It helps the managers to make a flexible budget which helps to ascertain the cost and profit at various level of activities and the managers based on the market demand and requirements can understand the operational level of activity and look towards using the resources in the most productive manner so that the business is able to get high returns (CVPA, 2012) This model helps the managers to decide upon new projects and the start up operations as looking into various level of operational activity and gauging the market demand the manager can understand whether producing or entering into a new line will be a profitable venture or not (CVPA, 2012) It helps the manager to evaluate the performance by using the benchmarking tools and controlling the business process so that efficiency in the manner the resources have been used and the future development efficiency in the use of resources can be made It helps the manages to ensure correct pricing for the product or services as using a match of profit through cost and revenue helps the managers to estimate the price which will be profitable for the business and accordingly ensure the correct price for the product or services Cost Volume Profit analysis helps the business in asscertaining the future operational efficiency levels as managers based on different levels are able to gauge the most efficient level and based on the different level of information that have been gathered look towards taking decision which helps the business to grow. Cost Volume Profit analysis has thereby facilitated the managers in different directions and provided the required tool that will help the business to be able to grow and ensure the most efficienct use of resources. The use of Cost Volume Profit analysis tool has increased as it provides important results for the managers as based on the tool the managers are able to identify the different areas which they can work on. This helps to ensure that the resources are made the best possible use and the organization based on the market requirements are able to ascertain the contribution margin being made by the product. This helps managers decide on the future variable expenses and look towards identifying the various areas that will help then to ensure maximum return. This will help the organization to ensure best possible use of the resources and help to develop a mechanism through which the organization is able to ensure maximum efficiency and growth for the business. References CVPA. 2012. Cost Volume Profit analysis. Retrieved on April 19, 2012 from http://simplestudies.com/accounting-cost-volume-profit-analysis.html Read More