KEY CONCEPT EXERCISE WEEK 4PART B

In recent years, the wide range of accounting application is expanding, along with the increasing need of economic market.

As is well known, accounting is a key aspect of business. Accounting is concerned with providing both financial and non-financial information that will help decision makers to make good decisions. An understanding of accounting therefore requires an understanding of the decision making process and an awareness of the users of accounting information (Anonymous 2010) .

Purpose of financial accounting

The main purpose of financial accounting is “to record and summarize all transactions made over a particular period of time (usually a year) and to arrange these facts into a financial statement that can be communicated and analyzed” (Anonymous 2012) . This information plays an important role for shareholders, who want to know how the business is performing and whether it makes profit or loss. The financial accounting is also of interest to other external users who are interested in organization’s performance, such as creditors, banks, potential investors, customers, tax inspectors and employees.

Purpose of management accounting

In contrast, “management accounting is used for internal control, for example: planning, forecasting, performance measurement and decision-making” (Anonymous 2010) . In other words, management accounting provides information for people inside the organization, e.g. managers, to help them control the business and make decisions for the future.

Cost Volume Profit Analysis

CVP analysis is “a systematic approach of examining the relationship between the changes in volume, cost, revenue and profit” (Anonymous 2012) . This leads that “CVP model analyzes the evolution of total revenue, total costs and operating profit as are changes in production levels (in the general economic activity), the selling price, the unit variable cost and / or fixed costs of a product” (Sorin and Carmen, 2010) .

This analysis is mostly used to plan the future production and sales activates, which will enable the firm to maximize its profit and to determine the breakeven point and the margin of safety. This information is important to ensure the survival of the firm in the short-run and also in the long run. BEP represents the minimum units that the company has to sell before it incurs losses. BEP is a no gain no loss situation where the total

revenue is equal to total costs. Margin of safety shows the maximum units that can be reduced before the company will incur a loss (Anonymous 2012)

Limitation of CVP

CVP is a short run, marginal analysis: it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though in the long run all costs are variable.

For longer-term analysis that considers the entire life cycle of a product, one therefore often prefers activity-based costing or throughput accounting.

On the same vain, CVP ignores the curvilinear nature of total revenue and total cost schedules. Moreover it assumes that changes in volume have no effect on the elasticity of the demand (Guidry, Horrigan and Craycraft, 1998)

My personal advise

According to (Gould, 2015) , CVP is a tool that will help the manager to take any strategic decision, which will enhance on the performance and the stability of any business. Moreover it gives a clear predication of the future action, which is crucial in determining a cooperation value. Therefore he should pay her more in order to implement such tool for him to take effective decisions regarding business growth and expansion

Bibliography

Anonymous (2012) 'Cost Volume Profit Analysis (Cvp Analysis)', Online, study mode

[Online]. Available from: http://www.studymode.com/essays/Cost-Volume-Profit-

Analysis-Cvp-Analysis-945798.html (Accessed: 6 September 2015). pp.1-4.

Anonymous (2010) Differences Between Managerial Accounting and Financial

Accounting [Online] studymode. http://www.studymode.com/essays/Differences-

Between-Managerial-Accounting-And-Financial-270770.html (Accessed: 6 september

2015).

Gould, M. (2015) 'Corporate Valuation', Research Starters: Business (Online Edition),

Available from: http://search.ebscohost.com.ezproxy.liv.ac.uk/login.aspx?

direct=true&db=ers&AN=89163625&site=eds-live&scope=site; (Accessed: 6 september

2015).

Guidry, F., Horrigan, J. O. and Craycraft, C. (1998) 'CVP Analysis: A New Look'

EBSCO. (1), TY: MGZN; ID: Accession Number: edsjsr.40604183; Item Citation:

Journal of Managerial Issues, 4/1/1998, Vol. 10, Issue 1, p. 74-85; Accession Number:

edsjsr.40604183; Publication Type: Article; Source: Journal of Managerial Issues;

Language: English; Publication Date: 19980401; Rights: © 1998 Pittsburg State

University; Imprint: Pittsburg State University. Available from:

http://search.ebscohost.com.ezproxy.liv.ac.uk/login.aspx?

direct=true&db=edsjsr&AN=edsjsr.40604183&site=eds-live&scope=site; Pittsburg State

University. (Accessed: 6 september 2015). pp.74.

Sorin, B. and Carmen, S. (2010) 'Cost Volume Profit Model, the Break -Even Point and

the Decision Making Process in the Hospitality Industry', Annals of the University of

Oradea, Economic Science Series, 19 (2), EBSCO [Online]. Available from:

http://search.ebscohost.com.ezproxy.liv.ac.uk/login.aspx?

direct=true&db=bth&AN=65287364&site=eds-live&scope=site; (Accessed: 6 September

2015). pp.839-45.