Cost Volume Profit Analysis Based On The Real World Functioning Of Businesses

Assuming that the company’s goal is to maximize profits, the current cost system is not an appropriate tool for strategic planning. The ambiguity of the overhead costs per product makes it difficult to accurately analyze the cause and effect relationships of changes and/or improvements to specific product line.

2.) What is the ‘relevant range’ for the cost structure? In other words, at what volume might you expect the fixed and variable costs to change appreciably?

The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.

Cost-volume-profit analysis (CVP) is used by management accountants to identify the relationship between profit and the product price, sales volume, variable costs per unit and the total fixed manufacturing costs (Noreen, Brewer, & Garrison, 2011). Breakeven analysis is used in CVP in order to determine the level of sales that must be achieved in order for the company to break even. CVP analysis is primarily for management’s internal use as the metric and calculations are often not required to be disclosed to external stakeholders such as investors, regulators or financial institutions.

The breakeven point is used my companies to prevent loss. The Cost Volume Profit (CVP) is the tool in which to capture the breakeven point. Sometimes it is referred to as the breakeven analysis. The CVP assists the company in identifying future operation need, production costs, and expansion possibilities based on estimating costs, prices, and volumes. This profit response can help Competition Bikes determine the amount of needed sales, what products to manufacture, pricing policies, marketing strategies, and how much profit is actually needed. In this analysis we will assume

As upper-level management it is important to understand the key components of cost-volume-profit analysis. Identifying objectives including concepts related to CVP is crucial to the absorption of information.

12) Suppose a firm has $1500 in variable costs and $500 in fixed costs when it produces 500

Overall Theme We will explore fundamental assumptions of cost functions and discuss the relationships between cost behaviour, cost estimation and cost prediction. The concept of cost driver analysis and its application to cost estimation and cost management will also be discussed. We will also describe how to estimate cost behaviour using managerial judgment, engineering methods and other quantitative techniques.

Break-Even Analysis-Volume-Analysis is a systematic method of examining the relationship between changes in volume (that is output) and changes in Sales Revenue, Express and Net Profit. As a model of these relationships, Break-Even Analysis simpifies the real-world conditions which a firm will face.

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill

1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt

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.

Under the new cost system, two broad sources of costs were identified: manufacturing and SM&A. All costs within these categories were reclassified as either volume driven or order driven. Hence, four cost pools were set up.

Companies that are just starting out come from nowhere and overtake companies that have been in existence easily reason being that the new company enjoys a cost advantage because it has a better way of managing costs from the procurement of materials down to the delivery of produced goods to the customer. Competition and unpredictable economic situations are causing the need for better cost management and reduction to be the top concern for company managers. Cost and profit in business are a major part of what determines a company’s financial position and its ability to remain a going concern. To be profitable companies must not only earn revenues, but also control costs. If the costs are too high, profit margin will be low making it difficult for a company to succeed against its competitors. Since management is concerned with profitability, which measures business performance, especially in a manufacturing company, the need for higher sales will arise and this will bring about the need to increase production capacity, which in turn increases in cost. According to the American Industrialist, Andrew Carnegie, corporate bodies should watch their costs and the profit will take care of itself. This means that cost should be controlled rather than trying to use cost reduction methods that may also lead to the reduction in the quality of the product. Cost control is an essential aspect in every organization and if neglected will

Cost behavior is one of the most important aspect which helps in analyzing the nature and responses of different costs. Generally the cost behavior is breakdown of costs into fixed and variable components. The cost behavior is usually analyzed with the help of CVP analysis. The cost behavior patterns are analyzed by cost-volume-profit analysis, including the calculation of a firm 's break-even point in units and sales dollars.