Behavior How Do You Think

¶ … Behavior How do you think cost-volume-profit analysis reports should be utilized as a performance management tool? Cost-volume-profit analysis, commonly abbreviated as CVP, is an analysis that is concerned with the change in profits and costs following a change in volume. More explicitly, it focuses on the effects on profits of changes in factors such as fixed costs, variable costs, volume, selling prices, and mix products sold. Through studying the relationship between costs, net income, and sales, management is in a better position to cope with many planning decisions.

The various questions that may be answered through CVP are; what sales volume is necessary to break even? What sales volume is required to earn a targeted profit? What profit can be expected on a particular sales volume? How would variations in selling price, fixed costs, variable costs, and output influence profits? And how would an adjustment in the mix of products sold influence the break-even and target volume and profit potential? CVP analysis assists managers make very important business decisions such as whether to increase or lower discretionary expenditures.

For instance, if a business wants to invest in advertising then a CVP analysis would be carried out to determine the resulting incremental after-tax profit. When the analysis indicates that the expected profits will increase more than the costs for such an advertising campaign then the manager would most likely undertake the additional investment otherwise the investment will be avoided. The other importance of the CVP analysis is its usefulness in planning and monitoring operations and for motivating employee performance.

For instance, extraordinarily high costs in labor might indicate that the low-profit outlet is overstaffed or inefficient. Once a manager analyzes the reasons for variations in profitability, weight can be placed on reducing costs, increasing revenues, or both. The manager can also hold the responsible junior managers more accountable for performance, which should inspire their work efforts towards the goals of the overall manager (Eldenburg, & Wolcott, 2005). 2. In your opinion, would stakeholders benefit from external reports that use variable costing for reporting? Give examples.

Variable costing is a costing method under which those costs of production that vary in relation to output are treated as product costs, it is commonly compared to absorption costing which is a method that treats all production costs as product costs regardless whether they are fixed or variable. Using variable costing can be beneficial to stakeholders due to the advantages in holds over the absorption costing.

For instance, under variable costing, profits move in the same direction as sales since the profit for a period is not affected by changes in inventories considering factors such as costs, selling prices etc. are constant. This is an advantage to the stakeholders who are more concerned about the profits from which they benefit. When variable costing is used it is also easier to estimate the profitability of products, customers, and other sections of the business.

When absorption costing is used, profitability is made incomprehensible by capricious allocations of fixed costs. The other advantage that variable costing has that is relevant the stakeholders is that it is.