– A Comparative Study on the Application of Cost Volume Profit Analysis in Management Decisions of Manufacturing Organizations –
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ABSTRACT
The study examined the Application of Cost Volume Profit Analysis in Management Decisions of Manufacturing Organization.
Adopting a comparative survey design, primary source of data using questionnaire as instrument of data collection, sample size of 255 derived from population size of 700 using Taro Yamane formula and a regression method of data analysis; the findings of the study showed that cost volume profit analysis is essential in managerial decision of an organization.
Findings also showed that unit variable cost, marginal cost, unit per sale and total revenue affect manufacturing organization and for such manufacturing firms applies the knowledge of cost volume profit analysis in their managerial decision.
Therefore, the study recommends that Manufacturing organizations should effectively analysis the cost volume profit before embarking on any managerial decision.
Managers of manufacturing organization should always implement results obtained from their cost volumes analysis in order to ensure that the firm do not lose in their level of profit making and manufacturing organizations in their cost volume analysis should make sure that all their chains of production is effectively analysed to ascertain where improvement is needed when embarking on managerial decision.
INTRODUCTION
1.1 Background of the Study
Cost–Volume–Profit (C–V–P) analysis is the analysis of the cost evolution models, which points out the relations between cost, production volume and profit.
Cost-Volume-Profit (CVP) analysis from the accounting profession perception, is a managerial accounting technique that is concerned with the effect of sales volume and product costs on operating profit of a business.
According to Hilton, (2000:312),cost-volume-profit (CVP) analysis focuses on the number of units sold as the sole cost and revenue driver. In other words, sales revenue is assumed to be linear in terms of quantity of the units sold.
Conceptually, conventional linear cost-volume-profit (CVP) analysis is a simplified, short term planning technique that evolved as a practical version of the theoretical model of a firm (Marshall, A. 1890).
From an accounting perspective it is compatible with the direct, or variable costing method of inventory valuation.
To use the CVP model, a company must separate total costs into fixed and variable categories. The only activities that are allowed to affect variable costs in traditional cost-volume-profit analysis are production output and sales. Accordingly, fixed costs are those costs that do not vary with changes in the activity level. Hence, fixed costs are not constant.
By definition, fixed simply means that these costs are not driven by short run changes in production or sales volume.
Although explicit recognition of non-production volume related cost drivers is a key concept in activity based costing, the idea is ignored in the conventional linear CVP model.
It is important to recognize that the concept of fixed and variable costs is a short run concept. All costs tend to vary in the long run as the company adds to its’ capacity to produce and distribute products and services.
In a traditional Cost volume Profit analysis, costs are sharply categorized as fixed or variable with respect to the number of units sold.
Therefore, under traditional Cost volume Profit analysis, variable costs increase only as the number of units sold increases. The Cost–Volume–Profit analysis is useful in forecasting as well as in managerial control.
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