Use Of Variable Costing In Managerial Decisions

Use Of Variable Costing In Managerial Decisions

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Use Of Variable Costing In Managerial Decisions

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As already analyzed, variable costing is the decision-making tool in accounting which managers make use for internal reporting purposes. Variable costing can be used in various managerial decisions such as;

• Increasing profitability -the fixed production costs as well as sales stay the same for some time. A manager who considers using variable costing as a way of selling any added unit during a particular time-frame will add to the bottom-line profits as well as the sales of the company (King, 2006). This is since the units don’t cost the firm more capital in production. Since variable costing does not consider absorption or fixed costs, there is higher chance of profits increasing through the additional items
• Product offerings-variable costing is used by the management to establish which product to discontinue and which ones to offer (Kristensen, 2020). As opposed to discontinuation of a product which is linked to the negligible profits, the management may use variable costing to establish the general costs of maintaining any additional units, in production. For instance, if an organization currently offers three product and decides to discontinue one of them, the remaining two products will have to absorb higher overhead expenses
• Cost control-the use of variable costing system will help simplify customer and product profitability (Kristensen, 2020). As opposed to analyzing cost hidden data which would otherwise exist if a unit is produced or not, the variable costing will allow a manager to analyze data based entirely on actual production cost. The comprehension of every unit’s actual cost will allow the manager to reduce variances between budgeted and actual amounts. This translates to higher revenues and controlled costs for the company.

References

Drury, C. (1992). Cost-volume-profit analysis. Management and Cost Accounting, 205-235. doi:10.1007/978-1-4899-6828-9_9

Drury, C. (1992). Absorption costing and variable costing. Management and Cost Accounting, 182-202. doi:10.1007/978-1-4899-6828-9_8

Gandoura, G. F. (2017). The relationship between cost-volume profit management and profitability in private organizations. International Journal of Advanced Engineering Research and Science, 4(4), 281-288. doi:10.22161/ijaers.4.4.43

King, B. (2006). Absorption costing and variable costing income differences: Exceptions to the general expectations. SSRN Electronic Journal. doi:10.2139/ssrn.921283

Kristensen, T. B. (2020). Enabling use of standard variable costing in lean production. Production Planning & Control, 1-16. doi:10.1080/09537287.2020.1717662

Layne, W. A. (2004). Cost—Volume—Profit (C—V—P) analysis. Cost Accounting, 150-168. doi:10.1007/978-1-349-17691-5_10

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Answer 2

Cost-Volume-Profit (CVP) Analysis

According to Lula (2018), the study of CVP has become an essential tool that looks at adjustments in the level of income, sales volume, expenses, and prices. CVP analysis may be a useful method for defining the nature and aspects of economic challenges posed by the organization. CVP analysis ensures strategy and decision-making relevant information, which includes: the identification of issues in preparing goods for export, extension or decrease of the manufacturing line, manufacturing capability usage through nation growth or recession. The analysis demonstrated that CVP analysis is taken into consideration and plays an important role throughout decision-taking in the manufacturing context, affecting managerial decisions on the good or service, costs, and profits to be made. This research has become a significant part of service companies as well as tends to affect strategic decisions for the goods to be provided, the items to be procured by processing firms, and the needs of the company (Lula, 2018).

The authors stated that the primary goal of virtually all companies is to gain full benefit. The key element affecting benefit income is production rates (i.e., sales volume). CVP analyses the cost-benefit-to-business partnership to optimize income. The amount of output can vary because of several factors, including the rivalry, new product development, trade slump or boom, rise in commodity demand, insufficient capital, market adjustments in goods, Production rates can shift, and so on. Management needs to examine the impact on income in these situations because of increasing output rates. Management assistance can be used in this way through a variety of techniques. The cost-to-benefit study is one such methodology. In both limited and wider words, the term CVP analysis can be understood. The Break-even point (B.E.P) used in its limited context is the amount of production where the net expense is equal to the total value of the revenue (Abdullahi, Sulaimon, Mukhtar, & Musa, 2017).

Himeji et al. (2015) mentioned that CVP research is being used by management to schedule as well as track the interaction between sales, expenses, quantity adjustments, taxes, and earnings more effectively. The CVP analysis is measured interdependently and integrated into the variable cost estimation method. Indeed, the program estimation of variable costs relies on a principle to allocation to market performance, and the approach requires a good mix of costs and revenue amount to maximize financial results. The CVP calculation is often carried out through the crucial B.E.P of productivity. For other constraints, B.E.P may be analyzed quantitatively and graphically displayed. CVP research is a widely used method for making actions with valuable knowledge. CVP analyses are often used to take important and fair actions whether an organization is confronted with management issues that have consequences for costs and income. Such an issue involves income preparation, demand development, decision-making or purchasing, commodity expansion or reduction, manufacturing capability use in periods of economic boom, or downturn (Himeji, Operator, & Ognibene, 2015).

Use Of Variable Costing In Managerial Decisions

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