Question

The Cost-Value-Profit analysis is a necessary tool for forecasting as well as for management control. The authors present a paper which includes a number of techniques and methods based on understanding patterns of evolution characteristics of costs.

discuss why it is useful only in special circumstances.

USING COST-VOLUME-PROFIT ANALYSIS IN DECISION MAKING
by GABRIELA BUŞAN, IONELA-CLAUDIA DINA

Answer 1

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.

BUŞAN, GABRIELA; DINA, IONELA-CLAUDIA

Abstract: The cost-volume-profit study the manner how evolve the total revenues, the total costs and operating profit, as changes occur in volume production, sale price, the unit variable cost and/or fixed costs of a product.Managers use this analysis to answer different questions like: How will incomes and costs be affected if we still sell 1.000 units? But if you expand or reduce selling prices? If we expand our business in foreign markets?

The cost-volume-profit is a necessary tool for forecasting also for management control. The method includes a number of techniques and methods of solving problems based on understanding patterns of evolution characteristics of business costs. The techniques express the relationship between incomes, sales structure, costs, production volume and profits and include break-even analysis and profit forecasting processes. This relationship provides a general model of economic activity, which management can use to short-term forecasts for business performance evaluation and analysis of decision alternatives.

The marginal contribution is the difference between total revenue and totals variable costs and explains how changes the operating profit as changing the number of units sold. Can be calculated thus:

Marginal contribution = Marginal contribution per unit * Number of units sold

(1) Marginal contribution per unit = Selling price - Unit variable cost

(2) Marginal contribution can be expressed as a percentage, called the marginal contribution rate, being equal to the ratio of the marginal contribution per unit andselling price. The break-even is the amount of production sold for that total revenues equal total costsThis indicator tells managers how much the minimum production must sell for no loss.

In economic theory and in practice has imposed the cost-volume-profit analysis and as the critical point or threshold of profitability. This type of analysis is a very effective tool in risk analysis, since break-even can be defined as a measure of flexibility and enterprise in relation to fluctuations in its business. The result of the company is subject to unforeseen events that accompany work in all areas. The concept of "risk" is most often substituted by "flexibility". Regardless of economic or financial capacities of predominantly assigned, flexibility can be defined by the ability of business to adapt and to respond effectively to environmental changes.

The break-even is the point where incomes from operations cover the entire amount of operating expenses, operating result was nil. It represents the minimum level at which the company must work in order not to record a negative result (loss).

The work undertaken by the company above that level evolve a positive result (profit). By several criteria, determining the break-even may be in physical or value units, and the level of a product or group of products or the whole of the work. The methodology for analysis of operational critical point in the case of singleproductive enterprises or when we refer to a single product (product group). Implicit assumptions underlying the analysis are: can not be changed the price to buy production factors, can not influence the price of goods manufactured and sold, fixed costs do not vary over time, the expenditure variables are proportional to the level of activity Therefore, the only lever that can be driven by the enterprise to mitigate the effects of operating risk, to increase profitability, remains the level of activity. In order to determine the break even it uses three methods: method of equation, the marginal contribution method and graphical method.

Uses of CVP analysis
Many companies and accounting professionals use cost-volume-profit analysis to make informed decisions about the products or services they sell. In this regard, CVP analysis plays a larger role in managerial accounting than in financing accounting. Managerial accounting focuses on helping managers -- or those tasked with running businesses -- make smart, cost-effective moves. Financial accounting, by contrast, focuses more on painting an economic picture of a company so that outside parties, such as banks or investors, can determine how financially healthy it is.