Question

QUESTION ONE: COST–VOLUME–PROFIT (CVP) ANALYSIS

(a) Identify the SIX underlying assumptions of cost–volume–profit (CVP) analysis.

(b) Select ANY THREE assumptions given in (a) and discuss the difficulties that could arise in CVP analysis if these assumptions do not hold.

QUESTION TWO: PUTTING ACCOUNTING DECISIONS IN CONTEXT

(a) Describe TWO financial and TWO non-financial performance indicators which may be useful for users of the reports of a public benefit entity (e.g. a museum).

(b) If you were a member of the governing body of a public entity body, which ONE of the performance indicators described in (a) would you regard as the most useful to evaluating the entity’s success? State the reasons for your choice.

QUESTION THREE: FINANCIAL REPORTING AND PROFESSIONAL JUDGEMENT

Explain why the figures in financial statements are sometimes disputed even though reporting entities comply with accounting standards in the preparation of financial statements.

Answer 1

Question 1:- (a) The CVP analysis is subject to following limiting assumptions:-

• Costs are classified into Variable or fixed:- All costs are presumed to be classified as either variable or fixed. In the real business environment however, costs behave differently. Users of CVP Analysis need to be able to identify variable costs from fixed costs and vice-versa.    Variable costs per unit are constant. Total variable costs change directly with the volume of activity. On the other hand, total fixed costs remain constant regardless of the level of activity.
• Linear Relationship within the relevant range:- Costs and revenue relationships are linear within a relevantrange of activity and over a specified period of time.
• Inventory Level does not change from period to period:- It is assumed that all units produced are sold during the period; hence there is no change in the beginning & ending inventory levels.
• Volume is the only factor affecting variable costs:- As volume increases,the total variable costs increases directlywith the change in volume. If the variable costs per unit is say $10 per unit, the total variable costs would be equal to $10 multiplied by the number of units produced . It is important to take note that volume is the only factor affecting total variable costs.
• Selling Price is Constant:- The selling price & market consitions are constant. Also, if the business produces and sells multiple products, the sales mix is assumed constant.
• Cost- Volume-Profit (CVP) Analysis applies only to a short-term time horizon:- CVP analysis is a short term planning tool, because nothing remains stable in the long-run. In the condition of changing variables, all equations of CVP analysis need readjustment of figures.

(b) 1. If Fixed costs & variable costs do not seggregated:- There will be no clear seggregation between fixed and variable costs due to which entity will not be able to reach a conclusion that if the entity has to produce a certain product or not.

2. Selling Prices & Market Conditions are constant:- If both of these are not assumed to be constant, there will not be any comparison between company and industry data.

3.CVP Analysis applies only to short term:- Since nothing remains stable in long run if cvp analysis is used to find a long run conclusion, it will lead to no results. Rather than it will make figures a chaos.

Question 2:- (a):- Financial Indicators:- 1. Sales/ Revenues

                                                                   2. Profit or Income arising from Operations

                        Non-Financial Indicators:- 1. Employees' Competency

                                                                      2. Suppliers or Customers

(b) According to me, the company's employees are the most important assets for it. If employees are happy and satisfied they will lead the entity to a new platform. Even the customers staisfaction depends upon the behaviour of employees that how they treat them, are they taking a proper feedback from their customers.

           The companies with low employee turnover rate are more successful than other ones because thes type of companies also not have to spend much on recruitment process, hiring process. training process of employees. Therefore, it is said that employees are the valuable assets of the entity.

Question 3.:- Sometimes the figures in company's financial statements are disputed even though there is a compliance with the accounting standards in preparation of these statements. It is possible since proper compliance with the accounting standars can not ensure that financial statements are free from material statements. There can be window dressing or errors of ommission or errors of commission. The human or arithmetical errors can cause the misstatements in financial statements.

Further the users of financial statements can have different perspective towards their use. Therefore, such conflicts arise.