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PAA304 Performance Management
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GSM London
Performance Management (PAA304)
Added on 2020-04-29
PAA304 Performance Management
GSM London
Performance Management (PAA304)
Added on 2020-04-29
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Performance Management 1Performance Management
Performance Management 2Table of ContentsIntroduction......................................................................................................................................3Economist’s and Accountant’s break even charts...........................................................................3Analysis of CVP..............................................................................................................................4BreakevenPoint and High low methodof the company................................................................7Comparison of the two proposals..................................................................................................11Recommendations..........................................................................................................................14Conclusion.....................................................................................................................................18References......................................................................................................................................19Appendix........................................................................................................................................21
Performance Management 3IntroductionThis report mainly serves two objectives. This report will help in making an analysis of TheEconomist's break even charts and The Accountant's break even charts. Accountant's break evencharts and Economist's break even charts are different from each other but they have samefundamentals. An Analysis of CVP is also undertaken in this report. An analysis on Fixed costdoes not change with the volume of the output which incurs in the scale of production as fixed bythe management of the organization is also carried out in order to making the analysis that whatis meant by period of time and relevant range. An analysis on Breakeven Point and Margin ofSafety of the company based on its present cost structure for the second half year of 2016, andof the High-Low method of cost estimation is also carried out. Further a comparison betweentwo proposals is carried out in order to evaluate the best proposal after comparing all the aspects.Economist’s and Accountant’s break even chartsThe Economist's break even chartsThe way of economist’s break even chart has its own advantages for making an analysis of costsand break even charts. This method involves calculation of costs, profit and volume overdifferent range of activities. When shown in graph, revenue shows curvilinear trend (Schlicht,2012). Organization can increase its sale by making a reduction in its selling price and thus totalrevenue do not make an increase simultaneously with the output and thus revenue showscurvilinear trend. On the other side, variable costs make an increase at the time of low sales andlow production made by the organization and this happens because of increase in the cost ofoperations. It is said that once if the business maintains its efficiency in operations, the costsincreases very slowly and thus becomes less steeply and make an increase in linear graph. But, if
Performance Management 4the production activity is carried beyond the capacity of the plant than it will lead towardsproblem of breakdown and costs make an increase and thus it can be analyzed that the businesswill have two breakeven points (Osterwalder and Pigneur, 2010).The Accountant's break even chartsThe other method is accountant’s way of making an analysis on costs and revenue and stated thatthey have a relationship between them which is linear. It can be analyzed that both theAccountant's break even charts and Economist's break even charts are different from each otherbut they have same fundamentals. The major difference in the accountant’s way is that it put itsfocus on prediction of relationship of cost-volume-profit (CVP) in the relevant range wherebusiness is bringing constant returns to scale (Coase, 2012). This can be stated that both themethods use costs and revenue in the relevant range. Analysis of CVPAssumptions of Analysis of CVPIt can be assumed that all the costs can be categorized into fixed and variable costs. Fixed costsare the costs that are constant and do not vary with the product ion made by the organization andthe rent of the factory is one of the example. Variable cost can be termed as those cots which aredirectly related with the production and changes in proportionate with the output and if the firmproduces more than the variable cost of the firm will increase. Wages of workers is one of theexamples of variable costs. It can also be assumed that the factors which affect revenue and costsare termed as volume (Foster and Rosenzweig, 2010). CVP is considered important for makingan analysis of CVP. Break even is a calculation to determine the volume of sales at which thefirm will be not making any profits and even not making any losses.
Performance Management 5In analyzing CVP, an influential function is to analyze the breakeven point in units for theorganization (Nicholson and Snyder, 2014). You can compute the breakeven point in dollars bymultiply the sales price for your manufactured goods by the breakeven point in units. Fixed cost does not change with the volume of the output which incurs in the scale of productionas fixed by the management of the organization. In case if behavior of cost is linked to salesincome, it shows relationship of cost-volume-profit. In net effect, if change is being made involume, variable cost makes variation as per the change incurred in the volume. In this case ifselling price is made fixed, fixed remains fixed and then change in the profits incurred (Moulin,2014).Being a manager, one on a continuous basis strives to relate these elements in order to make themaximum profit. Apart from profit projection, the concept of Cost-Volume-Profit (CVP) isrelevant to virtually all decision-making areas mainly in the short run. The relationship amongcost, revenue and profit at different levels can be highlighted in graphs such as breakeven charts,profit volume graphs, and different other graphs (Cafferky, 2010). Profit depends on various factors like manufacturing cost and the volume of the sales. These boththe factors are linked with each other. The volume of costs relies upon the market forces andvolume of production which are related to the costs mainly. The management of the organizationdoes not possess any control over the market. In order to achieve certain level of effectiveness, ithas to use control and management of expenditure, mainly variable cost (Weiss, 2010). This isbecause fixed cost cannot be controlled in the organization. But then, cost is based on thefollowing factors:Volume of productionProduct mix
Performance Management 6Internal efficiency and the productivity of the factors of productionMethods of production and technologyBatch SizePlant SizeThus it can be analyzed that the cost-volume-profit analysis furnishes the complete scenario ofthe profit structure. This will help the management to make a differentiation among the effect ofsales, changes in volume and also the changes made to the price of the product. .In other words,CVP is a tool of management accounting which helps in showing the relationship between salevolume, cost and profit (Boland, 2014). CVP analysis also helps in answering various analyticalquestions which can prove profitable to the organization.Advantages of CVP analysisThe Managing Director is now aware of various importance of CVP analysis. CVP is quiteuseful in making analysis of breakeven point for the firm. CVP is also helpful in making chartsregarding breakeven point in order to make an identification of the profitability of theorganization (Rader, 2014). The relationships between profit, volume and revenue can bedepicted on the charts. CVP analysis will be helpful in budget planning and thus helpful iontaking decisions regarding pricing, mix of sales and different product mix. CVP analysis is alsoimportant technique for sensitivity analysis. CVP is very effective in calculation of profits andsales under different situations. The managing director can use the CVP analysis in order todetermine profits and sales when the unit prices of the products being changed. This will helpthe managing director to determine the best alternative for the profitability of the organization.This will also help in profit planning for the organization (Elsner et. al., 2014)CVP is also
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