Cost Accounting Report: CVP Analysis and Cost Savings Strategies

This report analyzes the cost-volume-profit (CVP) analysis for the Swiss Chocolate Manufacturing Company. It explores the impact of reducing variable or fixed costs on the forecast, identifying potential cost savings like material cost reduction through just-in-time purchasing, product design optimiz...Read More

Running head: COST ACCOUNTING
Cost accounting
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1COST ACCOUNTING
Table of Contents
Introduction................................................................................................................................2
1. Reduction of variable cost or fixed cost or variable cost to have impact on forecast.....2
1. Potential cost savings......................................................................................................3
2. Negative impact of decision on value chain...................................................................4
Conclusion..................................................................................................................................4
Reference....................................................................................................................................5

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Introduction
Cost – volume – profit (CVP) analysis is the cost accounting method that focuses on
the impact of various levels of volumes and costs have on the operating profit. CVP analysis
determines break-even point for various cost structure and sales volumes that can be used for
the managers to take short-term economic decisions (Banker et al., 2013). However, it makes
various assumptions like variable costs, fixed costs and selling price are constant.
1. Reduction of variable cost or fixed cost or variable cost to have impact on
forecast
The CVP analysis generally computes the number of units the company must sell to
achieve the break-even and to earn profit. Net income = Total revenue – Total cost where,
total cost = fixed cost + variable cost. Determining the relationship among the expenses and
revenue is the major thing to understand the profitability of the business. How the expenses
change the income level determines the business’s cost structure. Generally the costs are
segregated into variable accost and fixed cost. Fixed costs are independent of the product unit
that is the fixed cost remains constant with the changes in the unit. For instance, the
machinery expenses and rent expenses do not vary with the changes in output. On the
contrary, the variable costs vary with the changes in units. For instance, the material costs and
labour costs changes with the change in the units (Leong, 2014).
Example – If selling unit is 1000, selling price per unit is $ 50, variable cost per unit is $ 20,
total fixed cost is $ 10000, profit = (1000*50) – (1000*20) – 10000 = $ 20,000. However, if
the selling unit is changed to 900, others things being equal the profit will be = (900*50) –
(900*20) – 10000 = $ 17000.

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Further, if the operating leverage is considered changes in contribution margin will
have great impact on the operating leverage as the operating leverage = contribution margin /
operating margin. Taking into consideration the above mentioned example it can be found out
that –
Degree of operating leverage (when sales is 1000 units) = $ 30,000/$ 20,000 = 1.50
Degree of operating leverage (when sales is 900 units) = $ 27,000/$ 17,000 = 1.59
The margin of safety is excess of actual or budgeted sales over the break-even sales
that again varies with the level of variable cost.
Therefore, with the changes in variable cost the forecast will have maximum impact
(Long, Liu & Guan, 2014).
1. Potential cost savings
Based on the above answer Rick may suggest saving the variable cost to maintain the
profit and reducing the level of operating margin even if the volumes reduces. Different costs
those can be saved under the variable costs are as follows –
 Material cost – based on the overall view of the product analysis shall be made
regarding prioritization of improvement. Further, material shall be purchased in just –
in – time basis that is at the time of production. It will save the material handling cost
and
 Cost reduction through design – as the development phase of the product consumes
80% of the total production cost, developing a product design that will result into
minimization of overhead and wastage will have great impact on the product cost. For
reducing the product cost through product design will involve active participation
from vendors, purchasers and manufacturers.

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 Overhead cost – overhead costs can be reduced through implementing mass
customization or build-to-order for manufacturing the product based on the demand.
To minimize the overhead cost the entire cost shall be measured for quantifying the
overhead cost. The overhead shall be further minimized through controlling the in-
house manufacturing cost, avoiding the off-shore manufacturing and avoiding long
distance supply chains (Poss, 2014).
2. Negative impact of decision on value chain
Value chain is the high level method used for describing the procedure through which
the business receives the raw material and add value to raw material through different
procedures for manufacturing the final product and ultimately selling it to the customers.
Reducing material cost through just in time purchase will hamper the production process if
there is any urgent order. Further, reducing the cost through designing the product will lose
will hamper the production process if the workers are not well versed with the process and
design. This will lose a group of customers if they do not like the new design. Further, the
customers may not place order with the company if they want the product on urgent basis (de
Souza & Márcio de Almeida, 2013). These will eventually reduce and sales and profit. Other
ways in which the company may be impacted are –
 Sales volume will be lower as the customer will not get the product on time
 Quality of product will be hampered as the workers may not have expertise
knowledge on redesigned product
 It will lose the customers if long distance supplies are avoided (Liebich, Von
Zimmermann & Rapp, 2014).

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Conclusion
It can be concluded from above discussion that the variable cost can be controlled for
improving the cost volume profit analysis. However, before taking decisions regarding the
area where the cost will be cut-off impact of cost cutting on value chain shall be considered.
Reference
Banker, R. D., Basu, S., Byzalov, D., & Chen, J. (2013). Asymmetries in Cost-Volume-Profit
relation: Cost stickiness and conditional conservatism.
de Souza, C. D. R., & Márcio de Almeida, D. A. (2013). Value chain analysis applied to the
scrap tire reverse logistics chain: An applied study of co-processing in the cement
industry. Resources, Conservation and Recycling, 78, 15-25.
Leong, J. (2014). Cost-Volume-Profit Analysis for Profitability Management. Np, nd Web
Dec, 16.
Liebich, G., Von Zimmermann, P., & Rapp, R. (2014). U.S. Patent No. 8,706,707.
Washington, DC: U.S. Patent and Trademark Office.
Long, Y. T., Liu, B. H., & Guan, J. L. (2014). The tariff package selecting model base on
cost-volume-profit analysis. Economic Research Guide, 14, 273-275.
Poss, M. (2014). Robust combinatorial optimization with variable cost uncertainty. European
Journal of Operational Research, 237(3), 836-845.