Use of CVP Model in Manager’s Perspective

Use of CVP Model in Manager’s Perspective

Instructions/Descriptions

Use of CVP Model in Manager’s Perspective

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As a manager in a company, I can use the CVP model to consider how earnings are influenced by shifts in market costs, Volume, and prices. Cost applies to the company’s fixed and variable expenses. The number of items produced corresponds to the Volume. Profit applies to the amount of revenue the company earns provided the sales price of the goods, the sale value, and fixed and variable expenses for the corporation. This is an important method in financial and accounting operations. It is one of the most popular methods of strategic accounting for effective decision-making by managers. I would also use the relationship of CVP graphically in order to clearly show the connection between the number of revenue and income.

Example

A company sells an item for $100 per piece.

The variable cost of the company is $50 per unit.

The fixed costs of the company are $10,000.

The total costs of the company are $10,050 if it sells one unit, which shows that the company suffers from ($10,050 – $100) $9,050 loss.

Through CVP calculation, the company’s B.E.P calculation is the following:

Revenue (Unit of Sales x $100) = variable (Unit of Sales x $50) + fixed ($10,000) cost).

Thus, 200-unit sales had to make to reach B.E.P.

Variable Costing

Hasan stated that currently, the variable costing method has emerged from a period of time and are an increasingly valuable method in so many large manufacturing organizations for managing and regulating activities. However, it still does not function as extensively as absorption does, but it is increasingly common. Material costs in variable pricing are restricted to manufacturing costs, which are specifically connected to the material and differ with the amount of output. Both processing expenses, direct and indirect, are counted as expenses of the processed materials at the expense of absorption. This paper addresses variable costs, which are used mostly for internal data analysis and reporting and their usefulness throughout the network. Not necessarily limited to contingent and absorption costing. Accountants believe that variable costing satisfies internal criteria more efficiently, giving further transparency into expense interactions when the consumption costing follows public monitoring standards (Hasan, 2015).

As mention by Diallelic (2015), Cost management and the declaration of donation income are known as essential elements of an organizational Information Program. The method of variable costing has evolved as a consequence of the vital absorption expense strategy, which is mandatory for contemporary financial statements. This system reflects on the requirements of current managers and is used to compile performance reviews on the effectiveness of the operation carried out. These reports provide financial information about the company’s revenues, costs, and financial statements. The annual statements of sales are calculated in the traditional type by the company’s internal operational divisions and the goods delivered. The operating costs are listed according to their response to adjustments in the nature of the company’s operations in variable costs. The expense is split into two groups: fixed as well as a variable cost. A company’s profitability is measured according to the investment margin. The net investment margin would reflect the company operating costs and the anticipated benefit, i.e., a deviation between the gross income and the marginal costs of the goods produced (Diallelic, 2015).

As stated by the authors, just the part of the expense, which differs from the operation level, is taken into account in variable costing. It comes in the form of direct material, labor as well as variable overhead production costs. Fixed expenses of variable costing are not deemed part of the product expense. Fixed operating expenses, including overhead and distribution costs, therefore do not include such fixed costs of output throughout the variable costing of the inventory as well as the cost of the products produced. There are a variety of drawbacks of flexible pricing. CVP analysis may take details directly out of the variable costing. But it is not readily accessible in absorption costing. Variable expenses are explicitly displayed in the income statement by the operating cost; in this sense, fixed costs may be stressed and become fully competitive. Variable costing offers a clearer estimate of income because there is no arbitrary fixed cost distribution (Aleem, Khan, & Hamad, 2016).

Manager’s Perspective

As a manager, I would use variable costing to decide which goods to sell and which to avoid. The manager may use variable costing to assess the total costs of maintaining a unit in service instead of discontinuing a commodity-based on marginal earnings. In comparison, variable prices require managers to evaluate data depending on the real cost of manufacturing, instead of evaluating data embedded in prices, irrespective of whether a unit is generated or not. Comprehension of increasing unit’s real expenses helps management to minimize variances between the present level and the target, thus contributing to managed costs and better sales for the business.

Example

A.B.C. makes clothing for the wealthy that stay in the modern town. The managing accountant offers the following details, which the financial director of the group has evaluated:

Cloth raw material = $10 PU

Cloth labor cost = $6 PU

Total Fixed cost = $500,000 (redundant)

Sales team Salary = $250,000 (redundant)

Cloth related other direct costs (variable overhead) = $4 PU

Thus, Variable costing = $10 + $6 + $4

Per unit of cloth = $20

Use of CVP Model in Manager’s Perspective

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