Variable Costing and Cost-Volume-Profit-Analysis- Article summary and importance of the concepts
- The first article on Cost-Volume-Profit-Analysis (CVP) suggests that the management department uses the technique for making alternative decisions. As per Jaedicke & Robichek, (1964), CVP helps to identify the breakeven volume of products. The chances of error reduce by the consistent usage of CVP. The authors have conducted a secondary research and claimed that CVP could determine changes in the net and operating income of a company. Few assumptions are made while considering the usage of CVP. The authors stated that variable costs, sales price /unit, and fixed costs remain constant. In other words, it can identify the economic features of a manufactured product. The second article on CVP highlights the importance of the concept of decision-making. According to Buşan & Dina (2009), CVP aids while making decisions because it studies various factors such as the evolution of total revenues, operating profit, and overall costs. Changes take place in the sale price, volume production, and fixed or variable costs of the product. The managers analyze the differences and identify ways in which the sale of units can have an impact on expenses and income. The managers also predict the implications of expanding business operations in foreign markets. Hence, CVP facilitates decision-making. The third article on Variable Costing identifies ways in which it can guide the management of an organization. According to Gurzynski (1951), Variable Costing can help the management to identify significant and economically viable questions. The authors conducted a secondary research and stated that the concept could simplify product estimations. Using the actual or real costs involved in the production, the managers can analyze the data. They do not need to depend on identifying the hidden costs. The managers can determine a price that would ensure maximum profit, and it can be done by analyzing the price that customers mostly prefer.
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- CVP and Variable Costing aids in planning by determining the revenue level required in order to gain the desired level of profit. Moreover, the Variable Costing can identify the best or the most profitable price of a product. Thereafter, managers can plan the desired price to gain the desired profit. For example, a company desired to achieve a profit of $50,000. Sales revenue can be determined by dividing $150,000 by a margin contribution of 40%. The $150,000 is the sum of desired profit and fixed costs. The company can yield $375,000 as of the needed sales revenue.
- The author of the chosen article on Variable Costing has attempted to compare variable costing with normal costing. The effectiveness of both types of costing has been compared in case of internal reporting. According to Gersil & Kayal (2016), Normal Costing considers the variable components of costs involved in production while Variable Costing considers only the variable costs of production. The authors have also considered the usage of Full Costing that mainly involves costs related to direct labor, direct material, overhead of variable factory, and fixed factory. The study concludes that in terms of outcomes of goods, all three methods produce the same results. Another article on Variable Costing has been chosen. According to Fisher & Krumwiede (2012), a range of costing methods exists. However, making a choice can be difficult for managers in any given situation. The article has considered the benefits and consequences of choosing any one type of costing method. The managers need to identify the right method based on the level of correctness, convenience, and costs of implementation. The example of Nestle has been cited to explain that Nestle has always focused on using a good cost system as it can later pay higher dividends. The last article on CVP studies the performance of a restaurant and usage of the CVP method for financial analysis. According to Greenberg (1986), performance can be measured by identifying the volume of the business, along with the cost structure. The study highlights the importance of using the CVP method because it can calculate the effect of revenue changes. CVP transforms the operating statement, and it can simplify the decision-making process for managers. During the CVP analysis, it is assumed that all produced units will be sold, and the fixed costs will also remain stable. The performance of the restaurant has been affected by changes in the volume and costs of business operations.
- Both concepts can be used to gain insights about the profitability of the produced services and products. The cost of the product can be broken down into variable and fixed costs. Hence, before selling the product, a profitable price can be determined. For example, in a bakery, the cost of production of cake 1 is $15 (Cost of ingredients is $5, direct labor charge is $10), and cake 2 is $30 (Cost of ingredients is $10; direct labor charge is $20). Managers can identify ways to reduce the production costs of the cakes.
References
Buşan, G., & Dina, I. C. (2009). Using cost-volume-profit analysis in decision making. OF THE UNIVERSITY OF PETROŞANI∼ ECONOMICS∼, 9(3), 103-106.
Fisher, J. G., & Krumwiede, K. (2012). Product costing systems: Finding the right approach. Journal of Corporate Accounting & Finance, 23(3), 43-51.
Gersil, A., & Kayal, C. (2016). A Comparative Analysis of Normal Costing Method with Full Costing and Variable Costing in Internal Reporting. International Journal of Management, 7(3).
Greenberg, C. (1986). Analyzing restaurant performance: Relating cost and volume to profit. Cornell Hotel and Restaurant Administration Quarterly, 27(1), 9-11.
Gurzynski, Z. S. (1951). Variable Costing: An Aid to Management. South African Journal of Economics, 19(1), 62-74.
Jaedicke, R. K., & Robichek, A. A. (1964). Cost-volume-profit analysis under conditions of uncertainty. The Accounting Review, 39(4), 917.