Question

How can CVP techniques be used in supporting a company’s sustainability efforts? Conversely, how might CVP be a barrier to sustainability efforts?

Answer 1

Introduction:

Cost-volume-profit analysis is a technique that examines changes in profits, in sales volume, costs, and prices. Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the impact that varying levels of costs and volume have on operating profit. The cost-volume-profit analysis, also commonly known as break-even analysis, looks to determine the break-even point for different sales volumes and cost structures, which can be useful for managers making short-term economic decisions.

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique which studies the effect of sales volume and product costs on operating profit of a business. It shows how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more products.

CVP used as supporting a company's sustainbility efforts:

It examines changes in profit, in sales volume, costs and prices. CVP analysis can be valuable tool in identifying the stretch and size of the economic problems with which the company facing, this analysis helps locate these problems.

The CVP analysis is used to ensure information for planning and decision-making such as: choosing problems during planning of products for sale, expanding or narrowing the production line, exploitation of production capacities during the expansion or recession economy of the country. So that managerial accountants to make planning for the future, they should take it information about:

Products or services that affecting in profit maximizing?

Sales volume to reached target profit?

The necessary income to avoid losses?

The contribution margin should cover fixed costs in order to avoid risk?

Should a firm invest in highly automated machinery and reduce its labor force?

Should a firm advertise more to improve its sales?

Advantage

1) Aids Decision Making: CVP analysis provides managers with the advantage of being able to answer specific pragmatic questions needed in business analysis. Questions such as what the company's breakeven point is help managers project how future spending and production will contribute to the success or failure of the company. For instance, when a manager knows the breakeven point, he can tweak spending and increase production efforts to increase profitability. Because CVP analysis is based on statistical models, decisions can be broken down into probabilities that help with the decision-making process.

2) Detailed perspective: Another major benefit of CVP analysis is that it provides a detailed snapshot of company activity. This includes everything from the costs needed to produce a product to the amount of the product produced. This helps managers determine, very specifically, what the future will hold if variables are altered. For instance, transportation expenses and costs for materials can change. These variable costs can affect the bottom line.

CVP a barrier to sustainability efforts:

CVP analysis provides one of the more detailed and objective ways by which a manager can assess and even predict the course of business for the company and its employees. It makes several assumptions to be relevant, however, which means it will only ever be an approximate calculation.

Disadvatage:

1) Human Error: CVP analysis allows the manager to plug in variable costs to establish an idea of future performance, within a range of possibilities. This, however, can be a disadvantage to managers who are not detail-oriented and precise with the data they record. Projections based on cost estimates, rather than precise numbers, can result in inaccurate projections.

2)Limited for Multi-Product Operations: The CVP approach to analysis is beneficial, but it is limited in the amount of information it can provide in a multi-product operation. Much of the analysis that is done by business managers who use this approach is done based on a single product. Multi-product businesses, such as restaurants, can have a difficult time with CVP analysis because menu items, for instance, are likely to have many variable cost ratios. This makes the challenge of CVP analysis all the more difficult because it must be done for each specific product.

Approximations with CVP: Even though CVP analysis is based on specific data and requires tremendous attention to detail, the best that it can do is provide approximate answers to questions, rather than ones that are exact. It answers hypothetical questions better than it provides actual answers for solving problems. It leaves the business manager to decide how to act on the CVP analysis data he has at hand.

Note : If student finds the answer lengthy then he/ she can skip the first para of introduction part or the complete introduction part as per his/ her choice (but i recommend not to skip the intro part) and also he/ she can skip one of the disadvantage.