PLANNING AND MANAGERIAL APPLICATION
Importance of Profit-cost-volume to Managers
In the planning and management of a business, the analysis of cost-volume-profit (CVP) makes it possible to locate the level of output at which a business breaks even. Through the determination of costs, the value of sales and profits at different levels of output, a manager can be able to establish the relationship between volume, costs and profits of the business (Md., 2015). Alternatively, taking the total fixed cost and dividing it using the contributing margin ratio also gives the break-even point of a business. For instance, take “Company MN” which is fully aware that the sales price for its product “P” in the year 2021 is to be somewhere around $50 while associated variable costs are in the region of $30 thereby concluding that the resulting contribution per unit to be $20. Subsequently, the company having a fixed cost of $90,000 and a contribution margin of 40% will only break even when its total revenues are somewhere $230, 000. In that regard, it is possible from a manager’s end to work out the number of sales needed for a business to break even and start making profits. The CVP analysis journey actually begins from here.
Role of Variable Costing in managerial
In an attempt to determine the product that provides higher profits at a minimal cost of production and operation than the rest, managers will always rely on the variable costing method (Md., 2015). For instance, there may be a moment when a manager has to make a decision between closing down a business or continuing with it when circumstances include an initial commitment to pay employees their salaries plus others such as electricity bill and rent up to the end of the year. That means the manager will continue incurring costs even if he considers the decision to close down. Assuming the business’ total revenues at the beginning of the year is approximately $4800 but consumed $6000 hence resulting in a net loss of $1200. If the same continues in the succeeding month, the manager may find it extremely difficult to make a decision if variable costs cannot be separated from fixed costs.
References
Md. H. (2015). Variable Costing and its Applications in Manufacturing Company. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2675830