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This report is based on managerial accounting concepts that help in measuring, analyzing, identifying, communicating the financial information of the company so that the goals of the company can be achieved. Managerial accounting assists the internal information of the company which helps in taking effective decisions. To improve the quality of information, managerial accounting is used as it helps in maximizing the profit. In this report the major focus will be done on the cost volume profit (Baral, 2016).
Cost accounting is assessing both costs of the company such as fixed cost and the variable cost to capture the total cost of production in the company. In this report, the major focus will be done on the article of the cost-profit analysis which helps in evaluating the connection between cost and income and business volume for attaining the higher profits. The article is based on that CVP is the management tool for taking effective decisions in small business enterprises. The CVP is analyzed for the small business for providing useful information to management which is essential for selling, effective preparation, controlling and making effective decision problems.
Every organization is set up with the main goal of earning the profit. Small business enterprises are also set up for attaining the profit by engaging in the production of the goods and services which provides satisfaction to the consumers (Abdullahi, et al., 2017). The small business differs depending upon the country so its definition cannot be stated clearly. The socio-economic status of the country can be improved through small business enterprises in developed and developing countries. To reduce the underemployment many government policies are established which promote small business entrepreneurship.
The major goals of the small business undertaking are to maximize their profits. The profit of the company can be enhanced through the important factors which are the level of production which can also be stated as the volume of the output. In this article the major focus will be put on the CVP analysis which increases the profit of the company by making an effective relationship in the profit of the volume of the business and the cost of the company (Punniyamoorthy, 2017). The level of production can be changed in the business due to many reasons which will be stated in this article.
According to the author (Younis, et al., 2010), CVP analysis, the pricing decisions are majorly influenced because of the costs, customers, and competitors. It is also used for examining the costs of producing products and planning the profits for the decisions of the pricing. The level of production can be changed in the business due to many reasons such as due to the increasing competition on the market brings the new product, the demand of the product is increasing in the market, due to the boom or the trade depression, due to lack of resources in the company, due to the fluctuations in the selling price of the product, etc.
As per the author (Abdullahi, et al., 2017), CVP analysis is one of the methods which is used in the companies to manage such management cases which is stated above. The CVP analysis is the breakeven point of the company which is point where the sales value of the company is equivalent to the total cost. It is essential to attain the target cost which requires systematically analysis of selling prices, the volume of production, sales, expense, profit, and costs. It is analyzed that CVP analysis is the study of the interrelationships among the following: the prince of the product, the number or level of activities, the variable unit cost, the fixed total cost, and the product mix.
In the reviews of the author (Pelawiten and Ilat, 2014), small business enterprises have to make an important decision before starting the operations of the company. To reach the point of break-even, how much the company needs to sell is an important question. Without making the profit, all the cost is covered in the breakeven point. So the CVP is effective tool as per the author as it is effective management decision-making tool. This tool also helps in taking the decision on many other key factors too such as pricing of the product, choices of the product lines, etc. The small industries can be satisfied and even the stakeholders of the company can be satisfied with the ingredients of the profit planning.
According to the author (Hu, 2012), Nigeria, which is a developing country, there are many small business enterprises. Due to these SMEs, the poverty level in the country has reduced, and more employment opportunities have generated for the people. Even SMEs promote Indigenous entrepreneurship, so they play an important role in the country. In Nigeria there is 97% business which has less than 100 employees so it means a huge number of business which belongs to the small business only. So, Small business Enterprises use the CVP analysis to making better managerial decisions.
In the reviews of the author (Navaneetha, et al., 2017), the profit of the company also gets exaggerated by the variations in the cost, price effect and the trades volume of the company. CVP analysis is the predetermined cost of the company as per the author which helps in achieving maximum efficiency and manages the endeavors in the production process. It can also be stated as the cost plan which is related to the single cost unit. In the CVP variances are also used which is change between the actual cost and the CVP. This cost is marred under the effective operating conditions so they are determined the number of bases. The main use of CVP analysis is in the valuation of the stock, performance management control, etc. This cost should be attained by the company as per the author as this cost is the target cost. The strategically and operational decisions are taken from this management tool as it is the mathematical presentation tool for producing a product. This tool also states the interrelationship between the production volume, selling price profits and expenses of the company.
As per the author (Yadav, et al., 2019), the small business enterprises face the problems of the profit implications and the cost volume so this tool helps in taking the vital and reliable decision and also provides the ways to resolve those issues. In this managerial tool the connection between the price function and the product income is there so it helps in taking the strategic decisions of the company.
In the reviews of the author (Bonacim, et al., 2013), it is stated that the cost exceeds the income when there is a inferior level of action but when the incomes increase faster than the cost the activity income also increases. There is the curvilinear principle for the CVP analysis where the cost and the revenues are curved. There are some underlying assumptions also as per the author for cost volume profit analysis such as the principle will be curvilinear when there is the constant in the prices of production input, there is the proportional to the total variable cost to volume, the cost is divided into two-element fixed and the variable cost. There is more assumption such as volume is the only drive of cost, the revenues and the behavior are linear, and the selling price and the total fixed cost remains constant.
The factor which is major and required to influence the earning of profit is the production level. (CVP) analysis inspects the affiliation between cost and profit and business volume for maximizing profits. The change in production level is because of the market causes which include the competition, new product or service introduction, boom or bane, increase in demand, scarce resources as well as change in prices of products. It is essential for organizations to analyze the impact on profits because of change in the level of production (Antameng, et al., 2017). CVP analysis is used as a tool for analyzing the effect on profits. SME is required to make effective decisions for analyzing the break-even as it includes all the costs of production without any profits.
According to the author, CVP analysis helps in making effective decisions which also include product lines choice, product pricing, marketing strategy and utilizing the production facilities. In Nigeria, SME’s play a crucial role as they are considered as the indigenous entrepreneurship for reducing poverty and employment is provided to the people on large scale (lie and Ileana-Sorina, 2017). The managers are required to consider the CVP analysis for making managerial decisions. In Nigeria, SMEs consider the capital employed, turnover and employee number.
In SMEs, the close relationship between cost, volume, and profits are considered as the increase or decrease in one output affects the other. If you increase production, then cost per unit Units will decrease and unit profits will increase (Assa, 2013). Therefore, volume and profit include the direct relation, but volume is inversely proportional to cost.
As per the author (Kirlio?lu and Baral, 2012), it is analyzed that the CVP analyses are majorly used for measuring the performance, controlling, valuation of stock and selling price establishment. It is essential to attain the target cost which requires systematically analysis of selling prices, the volume of production, sales, expense, profit, and costs. It is analyzed that CVP analysis is the study of the interrelationships among the following: the price of the product, the number or level of activities, the variable unit cost, the fixed total cost, and the product mix.
According to the point of view of the author there are many issues in the cost-profit analysis and mainly are in the fields of calculation, appraisal, and time preference in case of choice of rate and in the selection of the project. Most of the issues are related to the analysis of the costs and their benefits. So, there are explanations of these issues (Machuga and Smith, 2013). The first one is the calculation also known as the enumeration which means when the costs and benefits are together in the project under the study where it is considered, but there are many problems comes in evaluating both the things at the same time.
The first problem is that it is difficult to take all prices and profits without double counting; second one is that sometimes some of the costs and benefits become intangible that may not be seen. In this case of transport cost and benefits evaluate only simple and direct costs and benefits that have some past consideration in the record. It leads to the major criticism in the cost-benefit evaluation for neglecting such things like effect of the transport projects on the surrounding and on the travelers that are not considered cyclists and pedestrians.
The second problem of cost-profit analysis is the appraisal that means evaluation. Many profits are related to the external to the body in which evaluation is made. This can be increased on the basis of the increases in the surplus of customers (Machuga, 2012). Their analysis is based upon the two presumptions. The first one is those small elements of the curve in demand are over the changes take place, in this case the marginal utility of money remains constant. This will create an error in the cost benefits because it is not easy to calculate the value of the benefits. The second presumption is the utilities are comparable in nature.
The third one is based on the author's point of view that is intangible that it is found that this is suitable measure for the calculation of intangibles like deaths and visual intrusions that are method should be given them some amount of value. The main problem is that in case of the exchange it is found that monetary values are only valid in this case. There are many more disadvantages to this procedure. If this method is used for the intangible analysis then it is much more benefited method to use. But there is only one intangible can be involved in it. But in case there are more than one intangible then this will create lots of problem in it. This method is not benefited to use in several intangibles.
Now text one is the value of time and it is mainly benefited in the case of intangibles in transport cost-benefit analysis that is saving the one’s time. In fact when there is study it is found that is it is much-benefited method. As duration of work employees work on the basis of hours and this affects their wage rates (Ihemeje, et al., 2015). But in case there are several intangibles and employees are less, and then there is demerit to using this method. Because employees have to increase their hour but at the same wage rate it is a major drawback. In case of leisure time this will leads to major problems. There is no direct conduct to reach the value of it, some indirect ways have to be found and it leads to the delay.
From the point of view of the author, it is said that time preference is based on the effect of choice that manages the rate of time preference that said to some importance between the current investment and the assumption of the future. And also between what is the current consumption and in the future date (Duyo, 2013). According to this benefits are based on consumption. If there is a higher rate of time preference then there will be lesser the importance of future consumption as compared to the present consumption. This means that if the rates are higher and higher in return then there will be shorter time period over the project that will considered at any costs or profits that is happened after the date of end it can be meant that it is in the minimum importance because they have such a low value in current period of time.
Another issue is that project selection is the easy way that provides the method of selection like choice of the projects with the highest profit cost ratio till the budget is consumed that can be agreed, and there are no schemes in it. If in case of one project there have lower profit-cost ratio then there will be preferable in the extra benefits that can be increased the extra costs. But in case if the size of the costs or profits of one scheme is based upon whether or not in another scheme is executed (Koraag 2016). In case of the urban transport plan can be meant to be consist of a large number of interdependent schemes which can be or cannot be executed. This can lead to the product in an impossibly large number of schemes that can be meant to be, each scheme separately gains the running of the transport then the model can be produced, then the estimated pattern of travel on the basis of the cost-benefit analysis.
At the point of the author the last one is the accuracy it is said that how accurate and value-free is the cost-profit analysis that is tool of making decisions. In form of the ideal there is meant that reproduces the effect of the forces of market in areas in which they do not act. It is not suitable in the method of evaluating the schemes which can be satisfying the policies which have end of non-economic. At the end that is involved in the result of production that is intangible nature, like that they cannot be measured in the terms of the physical nature that cannot be valued in the satisfactory in the terms of money which cannot be traded in the market.
The CVP analysis measures the economic characteristics of manufacturing a proposed product. On the basis of data of accounting, the cost-quantity-profit analysis uses for determining the number of sales required breaking even and the number of sales required to achieve the desired profit margin.
In the reviews, the author, the benefits of CVP analysis include the management of various business function which requires considering the various factors for the specialization and standardization of labor. According to Ndaliman and Bala (2007), break-even analysis is useful for improving the level of profits in small manufacturing companies. Fixed and variable parts and part of sales revenue that exceeds certain optimal production levels decrease, and total cost increases.
It was concluded in the planning, control, and decision making for the break-even point of Jordanian Industrial Corporation that most Jordanian Industrial Corporation plans to use break-even points in the control and decision-making process.
The author also elaborated that the CVP relationship is used by SMEs for providing useful information to management which is necessary for selling, effective planning, controlling and making effective decision problems. The effective business functions in which the analysis is used are the controlling, replacement of products, pricing decisions, the select channel of distribution, set volumes, controlling of budgets, planning of product budget, target budgets and measuring of performance in the foreign market (Osazevbaru, 2014). Cost and revenues are used for making pricing decisions as it directly affects the quality of products. It is essential for the managers to understand the patterns of cost behavior and cost drivers in order for evaluating the value chain and it is essential to achieve the profitability with the help of life cycle of products.
In CVP analysis, the pricing decisions are majorly influenced because of the costs, customers, and competitors. It is also used for examining the costs of producing products and planning the profits for the decisions of the pricing (Kim, 2014). It is analyzed that the main purpose of CVP analysis and break-even is providing the information for managing and planning for the profits which include the activities for the long as well as the short term. CVP analysis is used for making the effective as well as managerial decisions for the SMEs.
According to the author, it is the cost accounting method that is calculated by deciding the sales volume of the company with the contribution margin. The contribution to the company is evaluated by subtracting the sales from the variable cost. If the company wants to evaluate the sales volume then they have to add the target amount of profit per unit.
The analysis of CVP tells many things in the company such as it helps in evaluating the breakeven point of the sales. The breakeven point of the sales is evaluated by dividing the total fixed cost of the company by the ratio of the contribution margin. To analyses the desired outcome in fixed cost the profit may be added (Georgiev, 2014). The cost is reliable in the analysis of the CVP when fixed cost is specified within the production level. While analyzing the CVP analysis, the fixed cost is stable in the company and the units produced are assumed to be sold. The product contribution margin level is also managed by the analysis of the CVP. It is basically evaluated by the difference value of the total sales and the total variable cost. Any company can attain the profit as per the accounting terms when contribution margin of the company exceeds the level of the fixed cost. For reaching a minimum level of profit margin, the company uses this formula as it helps in analyzing how many units the company needed to cover all the costs.
As per the author (Banker, et al., 2013), there are many other managerial tools that can be used in small business enterprises such as EOQ, Variance Analysis, Decision theory, Budget, product cost, ABC costing and many others. Theses managerial accounting helps the company is not taking the effective decisions of the company but also for developing the plan and conveying the information. All the decisions made in small business enterprises rely on accounting information so these tools are effective in controlling and planning purposes also.
Even the goals of SMEs are also very short so theses managerial accounting helps the company in driving the revenues. It helps in motivating the employees by providing transparency in the company (Stefan, 2012). This managerial tool also helps in providing the historical reports so it becomes easy to evaluate the cost performance of the company by doing the comparison with the actual performance. If there are any issues in the company than it can be solved by managerial accounting tools.
From the above report it is concluded that CVP is the important managerial tool that is needed in every business enterprise whether it is small, medium or large as it has many benefits. With the help of this managerial tool effective decisions can be taken and plans can be made for the future period of action. In this report the issues in CVP analysis were also stated such as issues related to the analysis of the costs and its benefits. In this report the Small business Enterprises of the Nigeria Country have evaluated and it was found that there are major small industry companies only that use the managerial tools for taking the operational and the strategic decisions.
In this report the article has clearly studied and through that, it is evaluated that there are many definitions of the CVP which has been given by the different authors. From all those definitions and explanations it was found that main purpose of CVP analysis and break-even is providing the information for managing and planning for the profits which include the activities for the long as well as short term. CVP analysis is used for making the effective as well as managerial decisions for the SMEs.
CVP analysis is used as a tool for analyzing the effect on profits. SME is required to make effective decisions for analyzing the break-even as it includes all the costs of production without any profits which have stated in the article. The profit of the company can be enhanced through the important factors which are the level of production. The level of production can be changed in the business due to many reasons which have stated in this report. All the decisions made in the small business enterprises rely on the accounting information so CVP tool is effective in controlling and planning purposes also.
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