Comparative ratio analysis and cost-volume-profit analysis in managerial decision-making

Managerial Analysis

Managers use various analysis for various reasons. The comparative analysis compares line items in statements to past statements that detects changes in the accounts, which could indicate problem areas in operations. The ratio analysis detects emerging trends, weaknesses, and strengths of the business. The cost-volume-profit (CVP) analysis evaluates cost factor behaviors and shows how profits can be affected by the factors.

The comparison analysis is especially important to keep expenses in check. By comparing line items on the financial statements against previous period statements, changes can be detected and investigated. For example, where labor is one of the highest expenses, if labor is higher for this period with approximately the same sales volume, it shows a sign of wasted labor hours that would need to be investigated. Labor may not be being utilized in ways to prevent waste, which cuts into the profits. Another high area of waste can be with supplies. More supplies may be being used than what is needed to actually do the job assignment.

Ratio analysis is especially important to keep up with sales trends and to evaluate for strengths and weaknesses of the business. Ratios from current financial statements to previous statements can show trends in sales that are changing and need strategy review to maintain adequate sales volume. The ratio analysis acts as a warning sign to review which products to sell and determine adequate pricing. It tells a manager when customer needs and wants are changing.

When compared to other industry firms, the ratio analysis can show strengths and weaknesses in the business and be a valuable tool in determining better strategies to compete in the given industry. It tells a manager where they are doing well and how they can build on their strengths to do even better. On the other hand, it shows the weaknesses and helps determine better business strategies to build the weaknesses into strengths.

The CVP analysis enables managers to evaluate how prices, sales volume, variable costs, fixed costs, and product mix affect the profits (Brewer, Garrison, & Noreen 2010, p 262). It helps managers make informed decisions about what products to sell, prices to charge, appropriate marketing strategies, and appropriate cost structures to use in determining appropriate product mixes. It helps managers determine an appropriate budget to meet a certain amount of sales volume and receive a certain amount of operating profits. The CVP analysis shows a manager how much the sales volume can be before risk of loss occurs.