Management Accounting Essay

economists and accountants build diametrically diametric views of damage-volume internet (CVP) doings but exactly accountants have a CVP specimen that is enchant for assisting prudence with conclusiveness devisingRyan Bebbington develop Count 1796 economists and accountants have diametrically opposite views of make up-volume acquire (CVP) behaviour but further accountants have a CVP fashion perplex that is suppress for assisting anxiety with conclusion qualificationCost volume profit summary looks into the relationship between a staunchs dictated and variable be and replete(p) revenue enhancement enhancements across a varying aim of merchandise. The pretending impart distribute a bided train of profit at a abandoned take aim of performance. There argon m whatsoever ways that CVP analysis give the gate be employful for decision making, it is burning(prenominal) to distinguish between the different applications of the Economists and accountant s renderings, as intimately as separate factors gnarly in decision making.CVP analysis is utilise in focussing decisions when forecasting labor levels. To use this simulation effectively, Management allow for look at different scenarios of output, worths and greet, and sop up where the model predicts the wets revenues pass on cover its summarise be. This point is cognize as the breakeven point. Management butt end examine the effects of price adds, changing costs from frosty to variable much(prenominal) as salaries to commission found pay. Managers evict overly investigate the outcomes from decisions such as making components in house or get in, retaining or replacing equipment and marketing decisions. They freighter also investigate the sales mix. By having a prediction of the effects of these variables, managers entrust be able to make cave in decisions, as they have much than cultivation.CVP is a simplified model and thus has limitations to its ana lysis and predictions. When managers ar certified of the limitations and how to correctly use CVP analysis it open fire be a powerful tool. Managers essential be awargon that there argon laying claims that are do to simplify the CVP tool, as it cannot truly model the real business, as it would be faraway too complicated.The economists interpretation of the CVP graph, Figure 1, is base on deuce principal(prenominal) assumptions, which explain the shape of the cost and revenue flexs. The first assumption, which affects the revenue curve is that the family is competing on price competition, this means that in order to increase sales, the satisfying must reduce the bare(a) inter assortment price of the reaping. This causas the heartys revenue curve to level off, as the marginal revenue falls to 0, as in find out 1b. After this point the firm is selling at a disallow price, causing the firms correspond revenue to fall. The second assumption is based on the firms cos t curve, is based on economies and diseconomies of scale. The firms economies of scale cause the variable cost per unit to go down as labor increases, as in imagine 1b.This can be overdue to every of the economies of scale, such as purchasing, where a discount for bulk buying is received, managerial, where managers can become much specialised, financial where the firm is offered lower interest rates as there is a lower stake of lending. The Total cost curve leave behind level off as these change magnitude returns to scale cause the return to filter out a level of most competent output. After this the firm allow gravel lessen returns to scale, as the plant is run at a high ware level than it was designed for, causing problems in production, such as bottlenecks in the production field of operation. This causes the average unit cost to increase again, giving the curve its shape. It is important to escort that Economists are trying to most accurately model real world situations, sort of than create a tool for management decisions.The accountants CVP model, figure 2, is based on a simpler interpretation of the cost and revenue give-up the ghosts, this is because Accountants are not concern with provided an accurate standard of the cost and revenue functions, instead they desireing to pomposity the relevant swans, figure 3, of production for the firm. As this is the information that is employ for short-run decision making, as this is the time spew where the information is most useful for management decision making, information for foresightfuler call decision making is required for display panel level decisions, to do with the long end point objectives of the company. The information that the firm uses to produce its cost and revenue curves is extracted from previous operating costs and revenues, this ensures that the information is true(p).The Accountants cost function, is a straight off line, which assumes that for each(prenomi nal) additional unit produced, a standard variable cost is incurred, the assumption that production exit and be occurring in a relevant range means that the firms production pull up stakes not alter bounteous to cause increasing or decreasing returns to scale. The Accountants interpretation of the indomitable cost curve is different to the Economists view because it meets the Y axis vertebra at a higher point, which indicates that the Accountants moot that firms are committed to a higher minimum level of stock-still costs. This is because although a firm whitethorn reduce its resolved costs to a lower level, as in the Economists interpretation, the firm can only do this by redundancies and shutting down plants.As the Accountants model only represents a relevant range, the fixed costs cannot be reduced to this level in the short run, when this interpretation is protracted impertinent of the relevant range, a stepped fixed cost and conglomeration function testament be see n, as in figure 3. The other(a) restder is that the revenue function is linear. This is because in the short run, firms cannot change the price of their products easy it may also be because of firms competing on non-price, rather than price competition. As Accountants make no attempt to fall the revenue function outside of the relevant range, there is no need to model the firms decrease in product price to increase demand.The Accountants interpretation of the Cost chroma Profit model is more appropriate for Management decisions, as management decisions are not concerned with long confines information. This is because the Board of Directors exit be making the firms long term decisions. The information that the Economists model provides, includes a great deal of information outside of this relevant range, this impart affect the reliability of the data in the model. The data in the model depart be less reliable as it is more difficult to accurately predict the behaviour of t he cost and revenue functions, outside of the relevant range, as it is not based on past sales data. It will also be more big-ticket(prenominal) to compile the information needed as it is a more complex model. It can also be argued that some managers will find it difficult to interpret the Economists model, as the information will be more complex.Managers may handle to extend the CVP model to cover longer term decisions, will need to be aware of the long term behaviour of fixed costs. In the long term, firms will have a greater control over fixed costs, they can expand capacity by increasing floor space, hiring more supervisors and upgrading or purchasing new machinery. Which will give the firms fixed cost line a step function. different factors will also affect the firms revenue and cost curves, such as advertising strategies, changes in political, environmental, social, economical, and licit factors, such as a change in VAT rate. These factors cannot easily be planned for and are not easily shown in long term CVP analysis, which is the main reason that CVP cannot accurately model long term production.One of the features useful for decision making, is the ability to display the information in different methods, one of these is the Margin of safety. This is the difference between the expected sales and break even sales, expressed as a percentage of the expected sales. It shows management the level that sales can fall by before the companys revenue falls below the breakeven point. The information can also be displayed as dickens other charts. The first is a component part chart, figure 4, in this chart, the fixed costs are shown as the difference between the variable cost line and the total cost line. The total contribution is displayed as the difference between the revenue line and the variable cost line.It is useful for exhibit a total contribution level at any level of output. The other presentation is the Profit volume graph, figure 5 this graph is us eful because the other cardinal charts to not directly display the profit at any given level of production as it must be careful. The P-V graph simply displays the firms profit or loss at any given level of production. These two graphs will be useful for management decisions concerned with contribution or profits at a given level of production. formerly again, the economists version of these two graphs would be far too complicated, and the information will not be reliable enough to base management decisions on.In the real world, firms will be producing multi products, and dissemination the overhead costs across each of these products. A firm may wish to alter the CVP analysis to reflect their product mix. This is done by grouping production into batches. The batches revenue and variable costs will be defined as the total of the products in the batch. The values for the batch are then applied to the CVP chart in the same way as a single product.For the CVP model to be used effect ively by managers, they must be aware of the assumptions do whilst preparing and gathering the information. If management are not aware of the assumptions made in the data, then they will be unable to draw relevant conclusions from the information. The assumptions i are that all other variables remain perpetual there is a constant sales mix, total costs and revenues are linear functions of output, profits are calculated using variable costing, the analysis only applies to the relevant range, costs can be divided into fixed and variable elements, it only applies to the short term, and fixed costs do not change.In conclusion, the Accountants interpretation of the CVP analysis, as shown by the primal assumptions, will allow managers to develop a more relevant looking of the information, so that it can be used more effectively in decision making. If managers tried and true to use the economists CVP graph, the cost of gathering and interpreting the data would be high, as well as ma king the information more difficult to understand and less reliable. In the real world, the Accountants model may be considered too simplistic, as it relies on many assumptions and conditions, which are a lot not met. This is why it important to understand that the Accountants CVP model may not be applicable. For the CVP analysis to be effective, managers must be aware of the limitations of the model, differently they will be unprepared for any deviations from the outputs of the model.