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ACC5002 Management Accounting and Decision Making

Added on - 16 Sep 2021

  • ACC5002

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Running head: MANAGEMENT ACCOUNTING AND DECISION MAKING
Management Accounting and Decision Making
Name of the Student
Name of the University
Author’s Note
1MANAGEMENT ACCOUNTING AND DECISION MAKING
Introduction
The presence of different parts or divisions can be seen in the accounting and financial
operations of the business organizations. Management Accounting is considered as one of them.
Management accounting helps the managers of the companies to use the financial information in
the proper way in order to get assistance in the decision-making process (Kaplan and Atkinson
2015). Managers use different tools of management accounting and Cost-Volume-Profit
Analysis (CVP Analysis) can be considered as one of them. The managers of the business
organizations use the technique of CVP Analysis in order to determine the effects of change in
costs and volume on the operating income as well as net income of the companies (Hilton and
Platt 2013). In the recent years, many ongoing debates can be seen on the suitability of
management accounting practices within small and medium sized business organizations. One of
such debates can be seen related to the concern of the management accounting practitioners for
the best practice in the application of CVP Analysis including break even (Drury 2013). The
main aim of this essay is the analysis of different aspects of CVP Analysis. More specifically,
this essay undertakes a review of both the early and contemporary literatures on this particular
topic. This essay also shed light on some specific aspects like the purpose of CVP Analysis along
with its relevance and benefits.
Purposes of “Cost, Volume Profit Behavior”
It can be seen from the above discussion that the application of CVP Analysis helps the
managers of the business organizations in determining the effects of change in cost and volume
on income and net income. In this context, it needs to be mentioned that the organizations have
certain purposes behind the use of CVP Analysis and one major aspect of this essay is to take
2MANAGEMENT ACCOUNTING AND DECISION MAKING
into consideration all of these purposes behind the use of CVP Analysis in the business
organizations. Many business organizations all over the world and many management accounting
professionals use the technique of CVP Analysis in order to make effective business decisions
about the products and services they sell (Nas 2016). In this particular aspect, CVP Analysis is
considered as more purposeful in management accounting as compared to financial accounting.
Another major purpose behind the use of CVP Analysis is to provide major assistance to the
managers of the companies with the tasks of carrying on the business operations in daily basis.
More specifically, the managers of the organizations become able in making cost effective
moves in the daily business operations (Garvey, Book and Covert 2016). Effective forecast of the
organizational profit can be considered as another major purpose behind the use of CVP
Analysis. With the use of the technique of CVP Analysis, the organizational managers become
able in establishing relationship between the costs and profits as this plays an effective role in the
success of the companies (Garvey, Book and Covert 2016).
One crucial purpose behind the use of CVP Analysis is to establish flexible budget in the
organizations that helps in indicating organizational costs in various level of business activity. In
this context, it needs to be mentioned that sales and variable costs have a tendency to vary with
the output volume (Warren, Reeve and Duchac 2013). For this reason, the organizations are
required to consider the budget of the volume in the initial stage with the aim to establish budget
for the sales and variable costs. To the organizational managements, one major purpose behind
the use of CVP Analysis is performance evaluation of different business units with the aim to
implement organizational control. For the review of the achieved profits and incurred costs, there
is a necessity for the evaluation of the effects of change in costs and volume; and the application
of CVP Analysis helps the managers in this work. It can be seen that the organizational managers
3MANAGEMENT ACCOUNTING AND DECISION MAKING
have to consider the implementation of pricing policies (Schofield 2018). In this aspect, CVP
Analysis helps the organizational managers in formulating the pricing policy of their products
and services by taking into consideration the impacts of different price structures on both costs
and profits. All the management accounting practitioners are well aware of the fact that the
pricing policy plays an integral part to stabilize and fix the cost volumes, especially at the time of
economic depression. Lastly, another major purpose of the use of CVP Analysis is to know the
amount of overhead costs that need to be charged to the products and services at different level
of operation (Mishan 2015). These are the major purpose behind the use of CVP Analysis.
Relevance and Benefits of Cost-Volume-Profit Analysis
Relevance
It needs to be mentioned that the process of CVP Analysis has some major relevance in
the operations of the modern day businesses as they have to go through complex business
procedures. The use of CVP Analysis helps the modern day businesses to get the most profitable
combination of fixed cost, variable cost, selling price and sales volume. Under the process of
CVP Analysis, in case the reduction of the fixed costs can be done by greater amount, there is a
scope to increase the profit with the help in the reduction of contribution margin (Weygandt,
Kimmel and Kieso 2015). More commonly, it can be seen that the major way for improving the
organizational profit is the increase of the total contribution margin figure. Sometimes, one
major way to make this happen is the reduction in the fixed costs and thereby to increase the
volume. Under the process of CVP Analysis, the size of the unit contribution margin is a major
relevant aspect in the modern day businesses. For example, greater units of contribution margin
leads to the increased ability of the business organizations of spending in order to increase the
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