Management Accounting: CVP Analysis, Issues, and BEP Relationships

This report provides an in-depth analysis of Cost-Volume-Profit (CVP) analysis, a crucial technique in management accounting. It explores the fundamental concepts of CVP analysis, including how it helps organizations understand the impact of cost and volume changes on operating expenditures and net income. The report examines the application of CVP analysis as a managerial control mechanism, a model for indefinite estimation in decision-making, and a tool that incorporates capital costs. It also discusses the challenges and issues associated with uncertain analysis and decision-making within the CVP framework. Furthermore, the report highlights the relationships between CVP analysis and the Break-Even Point (BEP), emphasizing their importance in short-term planning and decision-making. The report concludes by summarizing the benefits and limitations of CVP analysis, emphasizing its usefulness despite some complications, particularly for short-term planning purposes. References using APA style are included.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................2
Literature Review.......................................................................................................................2
Cost Volume Profit (CVP) Analysis..........................................................................................2
A Mechanism of Economic Entity’s Managerial Control......................................................2
A Model of Indefinite Estimation for Decision-Making........................................................3
A Tool that incorporates Capital Costs..................................................................................3
CVP: Issues of Uncertain Analysis and Decision-Making........................................................3
CVP-BEP Relationships.............................................................................................................4
Conclusion..................................................................................................................................4
References..................................................................................................................................5

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Introduction
It is an inescapable point that the resources in the present world are scarce, and it has
to be handled more effectively by the organisation’s managers. The management has to
ensure about effective utilisation of the resources that is available inside and outside the
organisation (Niu & Du, 2015). Cost volume profit (CVP) analysis is the tool that can be used
by the organisation to figure out such matters. The report aims to discuss the uses of cost-
volume-profit analysis that is one of the managerial accounting technique. Further, it
demonstrates its concerned issues related to decision-making and its relationship with Break-
Even Point (BEP) thoroughly.
Literature Review
Cost Volume Profit (CVP) Analysis
The organisations have to figure out the reason for the effect on operating
expenditures and net income because of the changes in cost and volume. CVP analysis is
used to understand certain matters to make effective decisions. It can ascertain all the costs of
organisations that are categorised into fixed and variable costs (Armean & Ardeleanu, 2017).
However, it may be difficult to analyse due to multiple products with the uneven product line
and fluctuating demand within an uncertain environment.
CVP analysis can be used as:
A Mechanism of Economic Entity’s Managerial Control
The assessment of natural resources is a tough job to find which resource requires
significant concern for the organisations. CVP analysis is an effective control mechanism in
the context to define an estimated cost, quantity and profit (Lulaj & Iseni, 2018).
Management can plan and analyse the company’s CVP activities with the help of an adequate

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control mechanism. Consequently, economic entities stay competitive within an inexact and
competitive environment. The Break-even point can be the initial level of such analysis as it
provides a view of profit and the necessary sales level. Moreover, with a positive approach
over the analysis, the company may achieve a competitive advantage.
A Model of Indefinite Estimation for Decision-Making
The decision is based on the analysis made upon certain variables, and BEP supports
in the process of it. The assumptions cannot be entirely correct as BEP cannot differentiate
amongst two products and consequently, analysis is made on the whole of the product. The
CVP analysis is used as a model that has an uncertain estimation for decision-making (Baral,
2016). Although the technique is based on indefinite predictions, it can help an organisation
to utilise its resources effectively as a concern of cost, volume and profit.
A Tool that incorporates Capital Costs
CVP analysis reflects the economy of a producer in a calculative manner. It can be
used to evaluate the economic effects of several strategic and operational decision. It can
measure the product’s sensitivity and accordingly make some changes. CVP analysis
considers the cost of capital used for the proposed product’s production. The organisations
must initiate to use CVP model that integrates capital costs and bring changes in the product-
mix decisions and settlements in respect to the rise in price and mode’s complexity.
CVP: Issues of Uncertain Analysis and Decision-Making
Although the CVP analysis method is an essential tool in management accounting, it
has some issues that relate to uncertainty. The analytical decisions based on the predictions
within an uncertain environment may create a problematic situation for the organisations. If
the plans do not match with the actual position of the business in an uncertain business
environment, then it can be said as a wrong or dubious decision due to the uneven

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distribution (Said, 2016). The organisation may choose it as a good start of the functioning,
but it will be treated as a challenging issue of uncertain decision-making.
CVP-BEP Relationships
Break-even analysis can be called as a subset of CVP analysis that is used by an
organisation to understand the relationships amongst the cost, sales volume and profit. Some
ratios are essential in CVP analysis as similar to the BEP analysis (Iseni, 2018). Like the
marginal revenue, income ratio determines the increase or decrease in the expected profit that
is resulted from the changes in volume. The safety margin reflects the reduction in the
capacity of sales that takes place before the profit dissolves. The trend is the ratio that
indicates the relationship between the sales volume and the breakeven point. CVP and BEP
analysis can be useful for the short-term plan and decisions within an uncertain environment
for the organisation.
Conclusion
Thus, it can be concluded that CVP analysis provides an organisation with a strong
insight into their product or service’s profitability. Organisations and professionals use this
technique making a smart and cost-effective move. However, it has some weaknesses. For
example, CVP analysis may be unclear in case the company has numerous product line.
Because the break-even point will be represented as a whole, but each product has its own
BEP, and it may generate complication. Although of some complications, it is a better tool to
use to analyse for short-term plans rather than for long-term.

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References
Armean, D., & Ardeleanu, M. L. (2017). Performance Management By Cvp
Analysis. Business Excellence and Management, 7(2), 72-93.
Baral, G. (2016). Cost–Value–Profit Analysis and Target Costing with Fuzzy Logic
Theory. Mediterranean Journal of Social Sciences, 7(2), 21.
Iseni, E. (2018). Role of Analysis CVP (Cost-Volume-Profit) as Important Indicator
for Planning and Making Decisions in the Business
Environment. International Advisory Board, 343.
Lulaj, E., & Iseni, E. (2018). Role of Analysis CVP (Cost-Volume-Profit) as
Important Indicator for Planning and Making Decisions in the Business
Environment. European Journal of Economics and Business Studies, 4(2), 99-
114.
Niu, S., & Du, J. (2015, August). The Review of Management Accounting. In 2015
International Conference on Economy, Management and Education
Technology. Atlantis Press.
Said, H. A. (2016). Using different probability distributions for managerial accounting
technique: the cost-volume-profit analysis. Journal of Business and
Accounting, 9(1), 3.