Discussion topic Unit 3
Now that you have learned about cost-volume-profit analysis techniques, do you think these techniques can be used for all types of organizations (for-profit, not-for-profit, service, retail, manufacturing, etc.) or only certain organizations to make strategic business decisions? Why, or why not?
Unit 3 Discussion: Cost-Volume-Profit Analysis
Any organization can use the Cost-Volume-Profit techniques in its process of strategizing business activities. The CVP analysis or the Break-even analysis is used for determining the break-even point at different sales and costing patterns which are used by the financial managers in taking short-term decisions. Any business whether it is a profitable organization or a not-for-profit concern or a retail or a manufacturer, I believe should use CVP analysis in its managerial accounting techniques. CVP analysis also undertakes the contribution margin. The contribution margin should always exceed the fixed costs for the firm to be in profit. It is used to determine how a change in the firm’s fixed and variable costs affects a firm’s profitability or in other words how the change in the cost and volume are affecting the firm’s operating expenses and net income. The CVP analysis helps in getting a detailed snapshot of the company’s operating activity (Enyi, 2019, p.45).
The three main components of CVP analysis are the Cost i.e. the expenses incurred in manufacturing or acquiring a product, Volume i.e. the number of goods purchased, and Profit which is the result we get by deducting the total cost incurred from the gross selling price of the goods or services.
Non-profitable organizations use the Cost Volume Profit analysis to measure their output. There are many non-profitable organizations such as charitable stores where they resell the goods which they have received as charity. Here, also the use of CVP analysis is there to determine what volume of sales should be achieved to cover the minimum expenses incurred of wages, rent, and other utilities (Daniel et al. 2020, p.141).
For service industries, CVP analysis is used by different industries like auto repair companies, beauty salons, accounting firms, health care sectors, and other counterparts in the service industry.
The Cost Volume Profit analysis is a must for the manufacturing industries. When the firms are facing any managerial problems then they prefer using the CVP analysis as a tool to make sorted decisions with relation to volume, cost control, and deviations in profit. These kinds of problems may arise in the concerns like planning for the product, making or buying decisions, or making any changes by expanding or contracting the product line, etc. The managers must be efficient to make informed and accurate business decisions.
The manufacturing and retail enterprises measure their output in units but in the case of the non-profit organizations or the service industries, it differs from one another. Accounting professionals use CVP analysis to make informed decisions for the products or services they are dealing with.
Enyi, E. P. (2019). Joint Products CVP Analysis–Time for Methodical Review. Journal of Economics and Business, 2(4).
Daniel, T., Mahazi, K., & Mayanja, S. N. (2020). Management Accounting Information and Decision Making of Not-for-Profit Organisations in Rwanda. Science Journal of Business and Management, 8(3), 141.