Question

1. What do you understand by the term Cost-Volume-Profit Relationship
2. Write a note on Job order costing and Absorption Costing.
3. Discuss the usefulness of managerial accounting in decision making in an organizational setting.

Answer 1

Cost Volume Profit Relationship

It is an analysis which studies the relationship between the below listed factors and also the impact on the total profit. The factors are as follows-

- Selling price per unit and total sales amount

-Volume of sales

-Total cost which can be fixed or variable

It is a cost accounting tool which provides the picture of profit structure and hence helps in planning the profit. It also helps in managment decisions related to the volume required to produce by doing a what if analysis.

CVP is calculated as follows- Sx=VCx+FC+P

where S= Selling price, X= Sales volume, VC= Variable cost per unit, FC= Fixed cost, P=Profit

Job Order Costing & Absorption Costing

Job order costing tracks the cost and revenues by job. It is a system for assigning manufacturing costs of an individual unit of output. It is used when items produced are sufficiently different from each other and has a significant cost. The job cost record reports each item's material and labor that was actually used and assigned amount of manufacturing overheads. Eg a company that constructs custom designed buildings

Absorption costing

Absorption costing or full absorption costing is a method of costing which captures all costs associated with manufacturing a particular product. It not only includes material and labor but also manufacturing overheads. It does not include Selling and administrative expenses (variable or fixed). This method is used in preparing reports for financial statements and stock valuation purpose.

Usefulness of managerial accounting

• Managerial accounting helps assist users internal to the company in making well informed decisions.
• The financial and non financial information is presented at regular intervals which includes forecasts, budgets and helps in the planning activities.
• If the product is not performing as per the expected standards, management can identify at an early stage and avoid future losses. It can further help in modifying the sales strategy.
• It helps in controlling of business organization if there is increased sales of production, modernization and technological changes.
• It helps the management to improvise its services to the customers.