Discussion 2: Planning and Managerial Application
A. Using the Internet, review at least 3 articles on Profit-Cost-Volume relationship. Summary (300 words or more) the articles in your own words.
B. As a manager, why is Profit-cost-volume important in planning? Support your response with numerical example(s)
C. Using the Internet, review at least 3 articles on Variable Costing. Summary (300 words or more) the articles in your own words.
D. As a manager, discuss how you would use Variable Costing in managerial decisions Support your response with numerical example(s)
1) Original post for two different topics total 600 words
2) 3 Responses to classmates = 450 words total
3) 3 articles/peer reviewed references for one question and 3 Articles/Peer Reviewed references for other question.
4) Citation required in the body.
5) APA format
The profit cost volume relationship is a kind of analysis which helps to identify or examine the various changes in many of activity which are directly related to the sales, cost and overall profit. This kind of analysis is very helpful to collect the important information regarding the business and make its continuity. As we all know that to run a business is not an easy job and it requires a lot of analysis regarding the current market scenario. To establish the business in the market, the organization now facing many of difficulties to set its economic condition in a well and establish form. The cost and profit relationship analysis helps to assist the marketer to determine that how many units of different products must be sold within a specific time period. It will help in case when the business in a condition of break, so the business will continue without any interruption. It includes the total cost which consist both fixed cost and variable cost and these costs are covered by the total sales. The profit and cost analysis helps in business identify the effect of the profit which is going through the various changes and what is there impact on to the operating cost and its selling price. In organization there is a need to determine the sales volume which is required to achieve a certain profit level and also the establishment of the specific amount which is requires measuring the current sales level. The profit and cost analysis is completely based on the assumption which can be taken by knowing the current market and its environment which helps to know the exact requirement of the market and their customer. These are the different business operations which plays there key role to develop an organization and help in its establishment. (Weygandt, 2015)
Importance of Profit-cost-volume in planning
The analysis of profit cost volume is very important in planning because it works as an analytical tool for the business. This tool of relationship helps to studying the relationship in between the volume, cost, profit and there prices. It acts as an important part of business activity and also a part of marginal costing. It works as an integral part for the various process of profit planning of the organization. It includes the control in the use of the budget and other related expenditure. It gives the helpful overview regarding the profit planning process through which the organization can make a plan for their future prospective. For example like a certain company have their sales price particular product is $50 and its variable cost is like $30. So it can be assume that the degree of certainty of contribution in every year per unit is like $20. (Davis, 2011)
In business marketing the concept of variable costing is now arrived from a longer period which acts as a important tool in the different business planning and help to control the other important operation of business which is very helpful and required in no. of large industries. It is now progressively popular in among the all business and help to continue the business organization. When we talk about the variable costing then it directly related with the cost of certain product which directly depends on its manufacturing cost. The variable cost is totally based on the manufacturing cost of the product and may be vary with the production volume. The production volume defines the exact cost of variable costing. There is an also role of absorption costing which deals with the costing of all manufacturing costs which includes direct cost and indirect cost. These direct cost and indirect cost are the cost of product which spends during the manufacturing of the products. The variable costing is used only for the integral reporting and helps in the analysis of the total costing of the product. It helps to identify the various situations of business and marketing applicability. Even these costs are not consider as an exclusive cost and depends on the exact market values of the product. The variable costing is very effective in terms of their internal requirements because these costing helps to meet the exact requirement of the internal reporting and makes the inside cost better. In other hand the absorption cost is very helpful to achieve the exact external reporting requirement and also helps in market analysis of different category of products. The variable costing is a very identical and useful tool in business organization which controls the other important activity and gives their measure contribution in the business activity. (Rubin, 2012)
Use of Variable Costing
In business organization the variable costing can be applies as a framework of financial reporting. The managers can used this variable costing to analyze the break even analysis which helps to analyses the various no. of different units which require selling to start the earning of the product and helps to make a profit with the sale of the product. It also give their contribution in the determination of the margin which is related to the contribution of the product variable cost. The variable costing is also capable to understand the strong relationship in between the cost, volume and related profit. The variable cost is comprised of the total cost which is depends on the total sales and gaining profit from the sales. (Vlastakis, 2012)
For example, Calvin Klein has received an order to produce 100 shirts
Raw materials per unit = $15
Labor cost per unit = $10
Fixed cost in total = $400,000
Wages in total = $200,000
Other costs per unit = $2
According to the formula: by adding all of our costs per unit our total variable cost per shirt is:
Variable costing = $15+$10+$2= $27 per unit
Thesis Statement: Profit and cost volume relationship and its importance
- Summary of at least three articles on the Profit-Cost-Volume relationship.
Cost-volume-profit (CVP) analysis is used in determining how changes in cost and volume affect the net and operating incomes of a company. The following are assumed to be constant when performing the analysis: total fixed costs; sales price per unit; and variable costs. It is also assumed that everything is sold. CVP analysis is useful in making informed decisions concerning products and services that a company sells. It plays a key role in managerial accounting since it assists managers in running businesses, making smarter and cost-effective moves (Iseni, 2018). CVP assist companies in making their contribution margin which refers to the amount of sales revenue that remains after the deduction of variable expenses. The contribution margin assists companies in determining whether it should reduce their variable costs or increase the price per unit to increase the profitability of a given product or service.
Ihemeje, Okereafor, and Ogungbangbe (2015) assert that CVP systematically examines the inter-relationship between the volume of production, selling price, cost expenses, sales, and profits. The analysis is essential in the following areas: product planning; contraction or expansion of a product line; profit planning; effective utilization of productive capacity; and make or buy decision. Managers use CVP to facilitate effective planning and controlling. It is also known as a break-even analysis. CVP analysis enables managers to focus on the relationship between cost, revenues, taxes, volume changes, and profit. CVP analysis is triggered by the need to optimize and manage costs that may arise due to unforeseen events associated with economic activities. In the economic activity of any company, there are aspects of operational risks due to independent and dependent variables that affect exploitation activity and ultimately profitability (Stoenoiu, 2018). Therefore, CVP analysis is considered critical in enabling a company to adapt to the present and increase its competitive edge. CVP analysis is used in calculating the breaking point, the expected sales, and the safety margin.
- The importance of Profit-cost-volume in planning (numerical examples)
CVP assist in understanding the effects of business activities that have an influence on profitability. The profitability of a company is determined by cost, volume, and profits. Hence CVP is used in budgeting and planning. The contribution margin can provide insight into whether a company is making a profit before the deduction of fixed cost. For example, if a company X makes sales of $50000 and the total variable cost is $25000, assuming the company sells 10000 units, the sales per unit is $5 while the cost per unit is $2.5, making the contribution margin per unit to be ($5-$2.5) = $2.5. The contribution margin ratio is calculated by dividing the contribution margin by sales (50000-25000)/50000=50%. It can be concluded that the company’s income is positive after the sale of 10000units.
- Summary of at least three articles Variable Costing
- The use of Variable Costing in supporting managerial decisions.
A Profit-Cost-Volume relationship studies the relationship between the total sales, selling prices per unit volume and the variable and fixed costs associated with it. It further studies the relationship between these two entities with the profits which is the third entity. It is treated as an integral part of a firm’s planning process. It acts like a powerful tool that aids in decision making in the financial experts for most of the firms and helps the firms to achieve their income-oriented organizational goals. It specifies the relationship models between profits, fixed and variable costs and volume. (Singh, J., 2019). A profit cost volume relationship forecasts the impact of the contribution margin on the profits of the firm. It will help determine the impacts of the costs, volume on the profit margins. Secondly, it will help organizations to have an overview of the sales volume. With the rapid growth of demands in the market, there is a need to have a track of the sales volume. It helps in determining the financial status of the firm in the market. Another advantage of this analysis is that it helps in analyzing the product that has a high rate of demand and the profits it might yield for the firm. Along with this, it can equally analyze the products that don’t have much demand in the market and needs to be discontinued which is a critical decision to make. (Lulaj, E., & Iseni, E., 2018). But, the profit cost volume relationship makes it easier by showing up the numerical. These relationship analysis are considered quite critical and help in evaluating the business standards. As it examines the changes in the sales and profit cost activities it could be used as an active tracker tool that could help firms deal with their financial hustles. The relationship helps to structurize the relationship between the profits and the cost, and thus they end up to be the most essential components in financial budgeting and margin planning.(Lulaj, E., & Iseni, E., 2018)
Importance of Profit-Cost-Volume in planning with a numerical example:
Profit cost volume relationship is very essential in the planning phase of various decisions and projects within a firm. It helps managers to deal with the unit costs and to make decisions that could not only benefit the firm but also help in increasing the profit margins. They help in making better budget planning and also profit planning. It helps in finding the various tactics to bring out the profits from the products or units sold by the combination of cost and volume.
For example, a company ABC aims to make a profit of $100000 from the sale of electric appliances. The fixed cost is around $30,000, the variable cost per unit is $30. By using the profit cost volume relationship, the price per unit is -( (10,000 *30) + $30,000+$100000)/10000 = $43.
Thus, it clearly depicts the profit cost volume relationship where the ABC organization has to sell each unit with a price of $43 to gain the assumed profit of $100000.
Variable Costing –
Variable costing is generally considered a managerial concept. It is the method that involves the assigning of variable costs to the inventory. This involves the assigning of variable costs to the inventory and all the overhead costs are considered under expenses. This methodology of variable costing is basically used by managers for internal reporting purposes. Variable costing is also known as direct costing and is used to conduct a break-even analysis. (“Managerial Accounting”, n.d). Break-even analysis helps in determining the level of the sales for a specific product in a firm and helps in evaluating the profit margins for the firm. It also enables the establishment of the least and the lowest price for any unit that is to be sold, so that firms could gain more profits. Variable costing deals with manufacturing costs and treats them as period costs i.e. they are charged only in a specified period.(Maverick, J. B., 2019)
There are many advantages of variable costing and are as follows:
The first and foremost thing is that it gives managers, financial advisors and firms to have certain planning and control over the expenses and costs. It helps managers to estimate the sales and costs. Sales determination will further help in determining the production plans and costs. (Bragg, S., 2019). Next, it gives an overview and knowledge about the basic difference between the fixed and variable costs which is very crucial in analyzing the expenditures of a firm and in making accurate estimations over the expenditure at various levels of the production line. Lastly, it helps in taking better managerial decisions and in assessing the future costs and expenses in the firm. Thus it exhibits the various levels of costs and also the variable costs associated with it. (Bragg, S., 2019). Variable costs alone can ascertain cost in the short term decisions. Therefore, it could be concluded that the concept of variable costing is very crucial for a firm to manage its finances.
D. How managers use variable costing in making managerial decisions –
Variable costing is considered as a decision-making tool that is used by managers to make managerial decisions and for other internal purposes. Variable costing is a more efficient way to make decisions as it doesn’t include the expenses of the sold goods. Managers could take in variable costing for selling the additional units and this helps in making decisions that require the sale of timely selling of units or products that add up to the profit margins of the firm. As variable costing doesn’t consider the fixed costs, it could help managers to asses and increase the profit margins for the firm with the help of the sale of the additional units in the firm. (Louderback, J. G., & Holmen, J., 2003). Further, managers use variable costing to control the costs and expenses of the firm. It helps them to simply product estimation and to analyze the data for cost production. Managers could look over the individual costs of each unit and could take decisions that could help control the expenses and costs that are being invested over a product. Lastly, variable costing helps managers to evaluate a product’s essence in the long run and make decisions based on it to either continue or terminate the use of a product and helps maintain overall profitability. (Louderback, J. G., & Holmen, J., 2003)
- Numerical Example –
For example, ABC organization has received an order of 1,000 phone cases.
The raw material cost per unit = $10
Labor cost per unit= $6
Fixed costs =$500,000
Other costs = $4
Therefore, the variable costs = $10 + $6 + $4 = $20 per unit.