• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Economists and accountants have diametrically opposite views of cost-volume profit (CVP) behaviour but only accountant's have a CVP model that is appropriate for assisting management with decision making

Extracts from this document...

Introduction

[TYPE THE COMPANY NAME] BEA2003- Management Accounting Economists and accountants have diametrically opposite views of cost-volume profit (CVP) behaviour but only accountant's have a CVP model that is appropriate for assisting management with decision making Ryan Bebbington Word Count 1796 Economists and accountants have diametrically opposite views of cost-volume profit (CVP) behaviour but only accountant's have a CVP model that is appropriate for assisting management with decision making Cost volume profit analysis looks into the relationship between a firms fixed and variable costs and total revenues across a varying level of production. The model will give a predicted level of profit at a given level of production. There are many ways that CVP analysis can be useful for decision making, it is important to distinguish between the different applications of the Economists and Accountants interpretations, as well as other factors involved in decision making. CVP analysis is used in management decisions when forecasting production levels. To use this model effectively, Management will look at different scenarios of output, prices and costs, and see where the model predicts the firm's revenues will cover its total costs. This point is known as the breakeven point. Management can investigate the effects of price increases, changing costs from fixed to variable such as salaries to commission based pay. Managers can also investigate the outcomes from decisions such as making components in house or buying in, retaining or replacing equipment and marketing decisions. ...read more.

Middle

The Accountant's interpretation of the fixed cost curve is different to the Economist's view because it meets the Y axis at a higher point, which indicates that the Accountants believe that firms are committed to a higher minimum level of fixed costs. This is because although a firm may reduce its fixed costs to a lower level, as in the Economist's 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 extended outside of the relevant range, a stepped fixed cost and total function will be seen, as in figure 3. The other difference is that the revenue function is linear. This is because in the short run, firms cannot change the price of their products easily; it may also be because of firms competing on non-price, rather than price competition. As Accountants make no attempt to extend the revenue function outside of the relevant range, there is no need to model the firm's decrease in product price to increase demand. The Accountant's interpretation of the Cost Volume Profit model is more appropriate for Management decisions, as management decisions are not concerned with long term information. This is because the Board of Directors will be making the firms long term decisions. ...read more.

Conclusion

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 constant; 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 Accountant's interpretation of the CVP analysis, as shown by the underlying assumptions, will allow managers to develop a more relevant understanding of the information, so that it can be used more effectively in decision making. If managers tried to use the economists CVP graph, the cost of gathering and interpreting the data would be high, as well as making the information more difficult to understand and less reliable. In the real world, the Accountant's model may be considered too simplistic, as it relies on many assumptions and conditions, which are often not met. This is why it important to understand that the Accountant's CVP model may not be applicable. For the CVP analysis to be effective, managers must be aware of the limitations of the model, otherwise they will be unprepared for any deviations from the outputs of the model. i Drury C. 2004. Management and Cost accounting 6th edition P263-286 ?? ?? ?? ?? Candidate Number: 018255 Management Accounting BEA2003 Ryan Bebbington ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. Discuss and critically evaluate the role of management accountants in providing relevant information to ...

    CONCEPTS OF MODERN ACCOUNTING TECHNIQUES Organizations are increasingly applying the key success factors from the decision-making to implement strategies regardless of promote sustainability. Main elements of the development and implementation of strategies are to achieve long-term financial, social, and environmental performance.

  2. Contemporary issues in management accounting - Target costing,Life cycle costing andQuality ...

    Decoding the case using LCCA For solving this problem two samples of FRP bridges and three samples of PC bridges were taken. The initial solution that PC bridges shall be given preference over the FRP bridges may seem quite evident but only till we see the actual results using LCCA.

  1. An Analysis Of harmonization issues of accounting standards

    By using the researches above as the base, we will be using the model of yield compensation and also the accounting information at the 36 listed companies which are simultaneously issuing A-shares and B-shares in the Shanghai stock exchange to examine, compare and analyse the differences which are existing between the contents of accounting information based on CAS and IFRS.

  2. Working Capital Management

    The management of receivables is basically a problem of balancing profitability and liquidity. Soft credit terms are attractive for higher sales and hence longer the time a company allows its customers to pay, the higher are the sales and hence profits.

  1. ABC Costing Vs Traditional costing

    (2006) "Management Accounting for Business Decisions (Second Edition)" Pg: 243, Pearson Education Appendix Two: Stages to Implement Tradition Cost Accounting: CIMA Insider (2002) News article recites the following procedure to implement the traditional Absorption Costing method: Absorption costing is the method used to attribute indirect costs (overheads) to cost units.

  2. Case study Pedro Nuts! The use of absorption costing has allowed Knock to explain ...

    Therefore by absorption costing, it is possible to estimate the selling price including profit margin which was originally stated by Hugh as $2.64, which gave the total cost of peanuts. However, Pedro stated 'I will make a clear profit of 16 cents a bag' , this assumes that in order

  1. Compare the impact of the activity-based costing model and the traditional based costing model ...

    compete with Bandix and whether or not the S3 lens' cost is overcosted. When the management asks a team of its design and process engineers to analyze and evaluate the design, manufacturing, and distribution operations for the S3 lens, the team is very confident that the technology and process of the S3 lens are lower than Bandix and other companies.

  2. Capital budgeting: advantages and limitations

    Therefore, the identified and proposed investment opportunities are subjected to further preliminary screening by management to isolate the marginal and unreasonable proposal so that resources will not be wasted evaluating such proposals. At times, the preliminary screening may involve quantitative analysis and judgments based on intuition and experience.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work