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Cost Volume Profit Analysis

1109 words - 4 pages

Cost volume profit (CVP) analysis and costing for the 21st century has evolved into a very complex and difficult paradigm. Even the most gifted accountants find that grasping the entire concept of accounting for a corporation can be very mind-boggling and difficult. Yet, understanding such a fundamental principle can allow corporations to grow in ways that other, less educated, corporations can never dream to achieve and simultaneously understand the ‘bottom-line’. In this paper we will discuss value costing in the 21st century, other relevant costing methods, and the relevancy of CVP in today’s workplace.
Before we criticize and analyze CVP it’s important to have a good understanding of what it does for a company and the accountant. Cost-volume-profit analysis is also known as contribution margin analysis, which is the percentage of sales dollars after variable costs have been subtracted (Toolkit, N.D.). When you utilize the CVP method you use variable costs and fixed costs to determine the profit of the company and products. Variable costs are those that vary with the amount of volume created and sold and other extraneous factors that can change on a day-to-day basis. Fixed costs are those that stay constant, regardless of how much product is created or sold. By utilizing variable and fixed costs an accountant can find the breakeven point for a company, where cost equals revenue. Yet as simple as the concept may seem, the challenges in defining these variables, as a hard set number, is what truly makes this tool a difficult one to master.
The question now raised is if CVP a good model for all companies especially those evolving in the 21 Century? Kirshan Gupta argues the modern company is changing its focus to a more customer based establishment that focuses on value adding variables and reducing the number of non-value adding variables (2005). Unfortunately, not all companies are as benign and have the ability to define all their variables, especially when their product is so diverse and complex. Gupta states, “in virtual enterprises it is important to adopt a costing system based on performance and indentifying critical success factors and tracing the measures and metrics to those factors that would ultimately lead to an improved organizational performance and competitiveness and value” (Gupta , 2005). Simply put, due to companies evolving, their way of measuring their success can be better understood through a CVP analysis. But, due to the complexities and many assumptions created by that analysis, I would have to disagree. Gupta also states, “the cost and performance measures in “New Enterprises” have to focus on delivering value rather than merely trying to establish the historical cost (2005). I find this statement very relevant because historical cost only allows the company to see the beginning and the end, and separates them from the present. Understanding the present and ongoing cost is important in determining value of a...

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